By Sheryl Rowling
SAN DIEGO — The Tax Cuts and Jobs Act (TCJA) is complicated and confusing. If you’ve been reading articles, you’ll have seen illustrations of how the new rules will increase a typical individual’s tax liability while others were certain that TCJA will decrease the average taxpayer’s tax hit. Just know – The ramifications to any particular taxpayer depends on the individual situation. With that in mind, let’s get to the most asked questions.
Q: Will the new tax law lower my taxes?
A: The answer is “it depends.” If you typically write off more than $10,000 combined for state income taxes and property taxes and/or you deduct a lot of “miscellaneous itemized deductions” (like employee business expenses, union dues or financial advice), your tax bill will likely increase. If you’ve been subject to the Alternative Minimum Tax, it’s likely that your tax liability will be lower. There are lots of changes to the law, so to be sure, you will need to do an actual projection. Your CPA can help with that.
Q: I’m getting more in my paycheck every payday. That means my taxes have decreased, right?
A: Not necessarily. The withholding tables have changed to lower withheld taxes for most workers. This has nothing to do with what your actual liability will be! Thus, many people will be happy with the new tax law (i.e., for the November elections) because their paychecks are bigger but could end up owing a substantial amount come April 2019. The lesson here is – do a tax projection now to see if your withholding is adequate. At a minimum, you should save the extra money to use toward any tax due in April.
Q: I heard that I can only deduct interest on up to $750,000 of mortgage debt. My current loan balance is $950,000. Am I in trouble?
A: No. The $750,000 limit is only for new purchases. Loans on your existing home (prior to the new law) are still subject to the $1 million limit.
Q: I heard that home equity loan interest is no longer deductible. Is that true?
A: Yes. However, if your equity loan was taken out to purchase or improve your residence and your total home debt is less than $750,000 (or $1 million for homes owned prior to the new law), you can still deduct the interest. Equity loan interest for purchases unrelated to your home is no longer deductible.
Q: I heard that charitable contributions aren’t deductible any more. Can you please explain?
A: Sure. Charitable contributions continue to be deductible – up to 60 percent of your Adjusted Gross Income. However, if you claim the standard deduction, then you get no additional tax benefit from charitable contributions. Under the new tax law, more people will use the standard deduction rather than itemizing because the standard deduction has been doubled while write-offs for miscellaneous itemized deductions, mortgage interest, and taxes have been eliminated or reduced.
Q: Is there a way to get a tax benefit for charitable contributions if I take the standard deduction?
A: Yes. There are essentially two ways to do that:
1) Consider bunching your deductions. Just because you claim standard deduction in one year doesn’t mean you can’t qualify to itemize in another year. So, try bunching deductions every other year. In a year you want to itemize, pay more deductible expenses during that year. Let’s say you want to itemize in 2018. That means you need to “bunch” enough deductible expenses into 2018 to exceed the standard deduction threshold ($12,000 if you’re single and $24,000 if you’re married). Make your January 1st mortgage payment in December and prepay your 2019 charitable commitment by the end of 2018. This strategy could give you tax benefits in excess of the standard deduction every other year.
2) Consider a Qualified Charitable Distribution. If you are over age 70-1/2, you can direct part or all of your required minimum distributions to charity. This reduces your taxable IRA income and effectively creates an allowable deduction – even if you claim the standard deduction.
Q: I heard that we can now file our tax returns on a postcard. This is good news, right?
A: It would be good news if it were true! Unfortunately, the new tax law created much more complexity as well as hidden traps and opportunities. Unless you have a very basic return and will claim the standard deduction, you won’t be able to get away with a one or two page tax return.
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Rowling is a certified public accountant, personal finance specialist, and principal of Rowling & Associates. She may be contacted via sheryl.rowling@sdjewishworld.com