In December 2017, Congress passed a comprehensive tax overhaul. With several hundred pages of new tax regulations on the books and tax season just around the corner, Bay Area residents and business owners are eager to learn what the revised code will mean for them. We spoke with Russell Barnett, EA, CTC to help make sense of these new rules.
Businesses Will Be Most Affected by the Tax Overhaul
“The biggest changes to the tax code affect how business income is taxed,” says Mr. Barnett.“Small-business owners in particular need to consult with their accountants or tax preparers to reevaluate what their future tax obligations will be. In many cases, it could make sense for a business owner to alter how their company is incorporated. For instance, if you’re currently a sole proprietor, it may reduce your tax burden to change to an LLC. Or, if your business is organized as an S corporation, it may now make more sense to be a C corporation, depending on the structure of your income.”
Mr. Barnett stresses the need for small-business owners to confer with tax consultants who understand the complexities of the new rules. “These regulations contain a lot of moving parts, and not all tax advisors are comfortable with them yet,” he notes. “Business owners need to find someone who can do a comprehensive comparison and identify what form of incorporation will be most beneficial in the long term.”
Changes to Home-Related Tax Deductions
The new tax code changes the deductions homeowners can take on mortgage interest and home equity debt. The cap for mortgage interest deductions has been reduced from $1.1 million to $750,000. This number reflects total mortgage obligations for both primary and secondary residences, but it only affects properties purchased after December 15, 2017. “There’s a fair amount of grandfathering in the new tax rules, and we see that with the mortgage interest deduction,” says Mr. Barnett. “Except for those who have purchased homes very recently, most will see no change in their interest deduction. We’re waiting to see what will happen for homeowners who refinance. The IRS hasn’t made a final decision, but they’ve shown signs indicating that they’ll let homeowners keep their current deduction rates when refinancing properties purchased before December 15, 2017.”
Homeowners will also see tax changes regarding home equity debt. Before, people could deduct interest payments on up to $100,000 of home equity loans. “If you’re using that loan to improve or repair your home, you can still take that deduction,” says Mr. Barnett. “But if you’ve taken out a home equity loan for any other purpose, that deduction is gone. Unlike the mortgage interest deduction, this won’t be grandfathered.”
New Limits on State and Local Tax Deductions
For taxpayers who itemize their returns, there is now a $10,000 limit on the amount of state and local taxes they can deduct. “This $10,000 limit applies to the household—it’s not doubled for married couples,” explains Mr. Barnett. Also, taxpayers will no longer be able to deduct items categorized as miscellaneous expenses, such as union dues, tax preparation fees and non-reimbursed employee expenses. “While certain deductions are being reduced or eliminated, the standard deduction has nearly doubled to $24,000 for married couples,” says Mr. Barnett. “This means many people who chose to itemize in the past will now take the standard deduction. Your tax preparer, and even most software programs, can help you determine what makes the most sense for your filing.”
Tax Changes for Families
Mr. Barnett advises families with children to note certain tax code changes. Significant for many households will be the elimination of the personal exemption. “You used to be able to take a $4,050 exemption for yourself, your spouse and each dependent, but now, the personal exemption has been rolled into that higher standard deduction number,” explains Mr. Barnett. “Unfortunately, this won’t help larger families with many children. However, the child tax credit has doubled to $2,000 per child. Also, the income-based phase-out of that tax credit is now higher. At the end of the day, calculating whether your tax burden will go up or down will depend on a number of factors that you should discuss with your tax preparer.”
Mr. Barnett adds that the tax overhaul may encourage more families to participate in 529 plans. Originally, 529 plans were tax-advantaged savings accounts that allowed parents to set aside money for college expenses. But now parents can use up to $10,000 per year from these plans to pay for private school tuition. Again, the real tax savings for any particular family will have to be determined by an accountant.