It’s been a year since the Tax Cuts and Jobs Act of 2017 went into effect. And while higher standard deductibles and lower tax brackets mean that most Americans will pay less to Uncle Sam, there’s still a great deal of confusion over what TCJA does and doesn’t allow. In this article we’ll try to clear up five common areas of confusion so you can get a head start on 2019 tax-year planning.
1. Am I no longer allowed to itemize deductions?
This is one of the most common misconceptions about TCJA. You can still itemize deductions. However, since the standard deduction has been raised to $24,000 for married couples and $12,000 each for individuals or couples-filing-separately, most Americans won’t have itemized expenses that exceed these levels. However, if yours do, you may still be able to deduct the excess amount.
2. It is true that I can’t deduct charitable deductions?
This is only true if the combined value of all itemized expenses, including charitable donations, doesn’t exceed the standard deductible threshold.
One way around this is to “bundle” several years’ worth of contributions in a single year.
For example, if you and your spouse have $23,000 in deductible expenses this year, including $10,000 in charitable donations you make annually, you might choose to bundle two years’ worth of contributions, or $20,000, into one donation in 2019. This would raise your deductible expenses to $33,000, which would allow you to itemize them.
Also note that TCJA raises the deductible limits of cash donations from 50% of Adjusted Gross Income to 60%. You can also carry forward any amount that exceeds AGI for up to five years. For more information, read our article on charitable giving and TCJA.
3. Am I no longer able to deduct home-loan interest?
This is probably the most misunderstood aspect of the new tax laws. Whether you can or can’t deduct home-loan interest depends on a number of factors. Here’s a high-level summary.
- You actually can deduct interest from a home equity loan or line of credit (HELOC) secured by a home as long as you use the loan only for home-improvement purposes. You cannot deduct interest from HELOC money you use for other purposes, such as buying a vacation home or paying for your children’s college tuition. If you want to deduct HELOC interest make absolutely sure you can document that this money is being used solely for home-related projects.
- The maximum amount of combined mortgage and HELOC interest you can deduct is $750,000 per year for married couples ($375,000 for individuals or couples filing separately). For example, if you take out a $500,000 mortgage to buy a home and a $300,000 HELOC to pay for an addition to that home, you can only deduct interest on $750,000 of those combined loans.
Note that if you took out a mortgage or started using a HELOC for home improvements before December 15, 2017, you can deduct interest on up to $1 million of these loans, the limit that existed before TCJA was enacted.
4. Can I no longer deduct state taxes?
TCJA places a cap of $10,000 for married couples ($5,000 for individuals or couples filing separately) on deductible state taxes. This amount can include combinations of allowable state income taxes, sales taxes, local taxes or real estate taxes. But you can only deduct them if you’re able to itemize deductions.
5. Can I assume my employer is withholding the correct amount of taxes from my paycheck?
When TCJA went into effect in 2018, the IRS adjusted employer tax withholding rates accordingly. As a result, many employees saw an increase in take-home pay. However, withheld amounts may not be enough to cover additional taxable income from bonds, stock dividends and capital gains taxes. If this extra income pushes you into a higher tax bracket that isn’t offset by your standard or itemized deductions, you may end up with an unwanted tax surprise.
Tax planning for 2019 and beyond
Those most likely to be adversely affected by TCJA are higher-income taxpayers who used to rely on deducting all of their state income and real estate taxes to lower their taxable income. If you want to lower your 2019 tax burden, you may be able to accomplish this by:
- Increasing the amount of federal income taxes withheld from your paycheck, so you may owe less at the end of the year (or even get a refund).
- Selling underperforming investments at a loss to offset long-term capital gains from “winners” in your portfolio, a strategy known as tax-loss harvesting.
- Increasing pre-tax contributions to your employer-sponsored retirement plan.
- Bundling several years’ worth of charitable donations to push the total value of itemized deductions over the standard deduction threshold.
Given the complexities of the new tax laws, it’s important to consult with your accountant or tax planning professional before you make any financial moves. You should also include your financial advisor in any discussions relating to actions affecting your investment portfolio.
This article offers general information and should not be viewed as personalized tax or legal advice. Although we strive to make this information is accurate and useful, you should consult with a tax preparer, professional tax advisor, or lawyer before implementing any tax-related actions.
This article was authored by Dan Flanagan and Jeffrey Briskin. Dan is a financial advisor and Partner located at Canby Financial Advisors, 161 Worcester Road, Framingham, MA 01701. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. He can be reached at 508.598.1082 or at [email protected]. Jeffrey Briskin is Director of Marketing at Canby Financial Advisors.
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