Well, yesterday the historic tax reform passed votes in the House and Senate, leaving just a presidential signature (which is basically a sure thing) before it becomes the law of the land. What started out with ambitious goals of a massive simplification of the tax code, turned into a more mainstream tax rewrite. While many of the changes are quite dramatic, this was more of a “reshuffling” than an across the board rewrite. The changes are numerous, and we have a link here outlining some of the more nuanced changes to individuals if you are interested. In the body of our note, we just want to highlight some of the more relevant changes that will likely apply to most of our clients.
- New tax brackets: The original idea was that there would be fewer than the current 7 tax brackets, but ultimately all 7 survived, though they have all been reduced.
- State and property taxes: This is a biggie for us in California. Basically, this deduction is gone. I say basically because you can still get up to a $10,000 deduction, but for a California household with two working professionals you’re talking about a $30,000+ deduction that vaporizes…..well kind of….see next point
- AMT: This dreaded monster hits most of our clients here in California. I won’t go into the details, but it basically negated the State and Property tax deduction. So, in reality, the point above is not as bad as it seems at first glance. The original dream was getting rid of AMT, but that did not happen, at least not for individuals…it did for companies. However, it doesn’t hit until a much higher threshold now, so for most clients, it’s no longer an issue. So I suppose one less form to include in the big packet that gets sent to the IRS each year.
- 529 Plans Expanded: This is one of our favorite methods for saving for college. Now, $10,000 each year can also be used for things like K-12 private schools and even for homeschooling if you choose to go that route. So this makes an already attractive savings vehicle even more attractive.
- Mortgage and Home Equity Loan Interest: This went through many iterations, but ultimately it appears that interest on $750,000 of acquisition mortgage debt (debt to acquire, build, remodel, etc) will be deductible. Note that this is for new debt after December 15, 2017. Old mortgage debt will grandfather over, however, old home equity debt will not. Therefore, interest on equity loans will largely be nondeductible starting in 2018.
Again, many details are left to be ironed out, but these highlights will kick off the process of years of tax planning. Unfortunately, there aren’t many blanket answers or conclusions to be had. Every situation will be unique and it’s likely that many questions will come out that will not have clear answers. With so many changes, it’s even more important to have qualified advisors looking over your shoulder.