Significant tax reform has passed both of our Congressional chambers and is expected to affect 2018 taxes. Please see Mark Freeman’s commentary on the legislation for insight into his perspective.
The next 10 days present an opportunity to make last-minute changes, given the legislative change — especially if you count on some of the deductions that will disappear starting next year.
- The new law does not repeal alternative minimum tax (AMT); however, the exemption amount is substantially increased next year. Additionally, for tax years after 2018, the AMT exemption amount is indexed for inflation, which should minimize the impact to middle income taxpayers.
- Provided you usually itemize, you might consider focusing on deductions that are being cut or scaled back. This includes the new $10,000 cap on state and local taxes, or SALT. If you can and you do not expect to be subject to AMT in 2017, you might want to pay your property taxes before year end in December rather than January. Discuss this with your tax advisor before you take any action.
- Another change is related to mortgage interest deduction. Individuals will be able to deduct up to $750,000 in mortgage interest including both primary and second homes acquired after December 15, 2017. The limit on mortgage interest remains $1,000,000 if incurred before that date. The deduction for home equity interest was eliminated starting in 2018. The rule allows individuals to refinance mortgage debt of more than $750,000 incurred before December 15, 2017, without losing the interest deduction as long as the principal balance does not increase. It may make sense to make an extra mortgage payment prior to January 1, 2018.
- Estate and Gift Tax is retained in the new law; however, the estate exclusion amount, $5.6 million, is increased to $11.2 million for all deaths and taxable gifts made between January 1, 2018, and January 1, 2026.
- Another change that may help you is the impact on 529 plans. The tax bill expands the use of 529 savings plans to finance elementary, secondary and home-schools. A maximum of $10,000 per beneficiary per year can be used to pay for qualifying expenses for elementary and secondary school; 529s are funded with after-tax money, but income and gains are not taxable, and distributions are tax-free when used for qualifying education expenses. If you have a child or grandchild in school, consider whether you’d like to increase 529 savings in the new year.
Residential moving expenses will not be deductible in the coming years, nor will deductions for tax return preparation fees, personal property taxes, investment advisory fees and estate planning legal fees. Not much can be done before year end, unless you were planning to purchase a car in the near term. You might want to consider finalizing that purchase before January instead of holding off.
If you have a question about how the legislation impacts your portfolio, do not hesitate to reach out to us. We’re here to help you.