The Tax Cuts and Jobs Act, signed into law by President Trump on December 22, 2017, represents the biggest and most dramatic change to the U.S. tax code to take place in decades, and is expected to impact most everyone. Let’s explore just a few areas of most people’s lives that are likely to be affected by the new law.
(1) Buying a House
Buying a house in California, New York and in other high property value states has just become more expensive.
While deductions for state and local (sales and property) taxes paid are still available, they are now capped at $10,000 combined. In addition, starting this year, the cap on mortgage interest deductions has dropped from $1,000,000 to $750,000 for all homes purchased on or after December 15, 2017. Although this will have little effect on new homeowners in states like Texas, where the median home value is less than $175,000, this will profoundly impact taxpayers in states with high home values and property taxes.
In 2026, the mortgage interest cap will revert back to $1,000,000 for primary residences, but the new tax law contains no such sunset provision for second homes. Note that you will still be entitled to write off costs associated with renting out a vacation home, including a portion of your property taxes and mortgage interest.
(2) Having Children
Under the previous tax law, families could claim a $1,000 credit for every child under the age of 17. This credit began to phase out for couples earning more than $110,000 per year. The credit has now been doubled to $2,000 per child, and the phase out threshold has been raised from $110,000 to $400,000.
For people who don’t earn enough in a given year to pay taxes, they can still claim the credit, but their child tax credit refund is now limited to $1,400 per year.
Note that the new law also changes the guidelines for 529 education savings plans, which may now be used to pay tuition at private schools and religious schools, and to cover homeschooling expenses.
(3) Getting Divorced
The new tax law makes a fundamental change in the way that alimony is taxed. Through December 31, 2018, the payor will continue to be able to deduct the alimony they paid during the year and the recipient will have to pay taxes on it. For all divorces that take place after December 31, 2018, however, the paying spouse will not be able to deduct alimony paid, and the recipient will not have to pay taxes on it.
(4) Estate planning
In 2017, heirs had to pay an estate tax of 40% on all amounts over the threshold of $5.49 million for individuals and $10.98 million for couples. The new tax law doubles that threshold to $11.2 million for individuals and $22.4 million for couples, and will be repealed in 2026. This means that far fewer wealthy people will have to worry about estate taxes at their death.
These changes will affect your 2018 taxes, so start planning now!
For more information about how you can best take advantage of the new tax law changes, contact the attorneys and accountants at Moskowitz, LLP.