You probably haven’t heard much about the new tax law recently. After the rush of last-minute tax filing died down in April, it’s out of sight, out of mind for most for all things tax-related.
But on those occasions when you do hear people talk about the Tax Cuts and Jobs Act — the signature legislation that’s emerged under President Trump’s watch — they tend to do so with some misconceptions.
New tax law myths and misconceptions
Clark.com talked with Sara Gabrell, a CPA with metro Atlanta tax firm Value Added Inc., to clear things up.
Here are some of the most common myths about the new tax code debunked and a few finer points of the new law clarified:
Doing your taxes will be easy from now on
On the face of it, it’s easy to look at the new tax law and reason that the tax code has been simplified. After all, one of the cornerstones of the new law is the near doubling of the standard deduction. That means less record-keeping for most of us.
But that’s not the whole picture. While things are potentially getting easier for individuals and households, that’s not necessarily the case for contractors and small business owners.
“For your standard W-2 household, things will likely be much simpler,” according to Gabrell. “However, the practical application for self-employed filers is still being worked out by the IRS.”
At issue are qualified business income definitions, limitations for service-related businesses and income phase-out limitations/thresholds, among other things. We’re still awaiting more guidance from the IRS.
The tax law giveth and the tax law taxeth away
Just because a deduction like the personal exemption (previously $4,050 per person) is going away under the new tax law, that’s not necessarily a net negative.
That’s because some nice tax credits are being added to balance things out — particularly for young families and members of the sandwich generation (who have both aging parents and kids to care for).
In fact, the new tax law does the following:
- Increases the Child Tax Credit from $1,000 to $2,000 for each qualifying child (under the age of 17)
- Provides for an additional $500 credit for any qualifying non-child dependent, such as an elderly parent
- Allows more families to take advantage of these credits due to an increase in the adjusted gross income phaseout thresholds to $400,000 (up from $110,000) for married filing jointly and to $200,000 (up from $75,000) for other taxpayers.
“Seeing the ”˜loss’ of any deduction may (at face value) create a cause for concern, but this adjustment is actually good news for parents,” Gabrell says. “The increase to the Child Credit provides more direct benefit than the previous deduction and is now offered to more homes due to the higher phase out level.”
The new laws aren’t permanent
The new provisions of the Tax Cuts and Jobs Act aren’t written in stone. They went into effect beginning after December 31, 2017, which means they apply to anything in calendar year 2018. But they’re due to sunset in 2026.
So whether you love the new tax law or hate it, it won’t necessarily be around forever!
“It’s important for filers to consider how the new tax law will impact their unique tax situation — not only for the current year but also looking ahead to future years,” Gabrell says. She recommends meeting with a fee-only financial advisor or CPA to develop a road map that will maximize your tax savings on current and future wealth-building strategies.
The Obamacare individual mandate is still in effect for 2018
Following the start of the Trump administration, the GOP moved swiftly to repeal the individual mandate that required you to pay a fee if you didn’t have health insurance.
But that doesn’t mean it’s gone yet. In fact, the repeal doesn’t take effect until after December 31, 2018.
That said, even then you may qualify for a hardship exemption and not have to pay. See a list of exemptions here.
Your mortgage interest is probably still deductible
Maybe you heard that your mortgage interest deduction on your primary or second home will be capped at $750,000 if married filing jointly ($375,000 all other filers) under the new tax law.
But that’s only for new home purchases made on or after December 15, 2017. If you bought your home prior to that date, you can keep the current limitation of $1 million ($500,000 in the case of married taxpayers filing separately).
Another way a buyer could come under the $1 million cap would be if they had a written binding contract before December 15, 2017, to close on a principal residence (not a second home) before January 1, 2018. In that case, if you did in fact end up closing before April 1, 2018, you’d be grandfathered in under the $1 million limitation.
“This area of the code saw significant changes, but likely won’t impact the average taxpayer,” Gabrell says. “However, if you are planning that big dream home purchase in the next year, be sure to chat with your CPA on the specifics of these new limitations.”
You may still be able to deduct interest on home equity loans
The key thing to know here is if you use money from a home equity loan, home equity line of credit (HELOC) or second mortgage to buy, build or substantially improve the home securing the loan, then it will be deductible.
But if you use the money to pay off a credit card or take a vacation, then it’s not deductible.
Gabrell’s advice? “Keep good records on how you use the proceeds of a home equity loan.”
You can still itemize your deductions
The standard deduction has increased, but you may still qualify to take the itemized deduction.
“One common tax planning strategy (for filers with itemized deductions close to the standard deduction) provides for ‘bunching’ certain types of itemized deductions, such as charitable contributions, medical expenses, and state and local taxes, together in the same year,” Gabrell says.
New expanded rules apply to 529
Once exclusively for higher education, 529 money can now also be used for elementary or secondary public, private or religious school tuition, up to $10,000 per year.