Changes to Mortgage Interest deduction for 2018

During the 2018 tax season one of the most common questions I got from clients had to do with  whether they will lose their mortgage interest deduction in 2018.  Many of them had heard incorrect information about what is changing and not changing in the new law.

So, what does the new law change?   For rental properties mortgage interest was and still is deductible as a rental expense.  Nothing really changed there.  For personal residences there were some changes.  Tax law defines two types of deductible interest for personal residences, acquisition indebtedness and equity indebtedness.  Under the old law, you could deduct interest on up to 1 million dollars to buy or improve up to two personal residences. (Acquisition Indebtedness)  You could also deduct interest on up to 100,000 borrowed against the equity in your residence. (Equity Indebtedness)

Under the new law, the limit for acquisition indebtedness does not change on any existing mortgage, but for new mortgages the limit for acquisition indebtedness has dropped to 750,000.  As under the old law, you can still deduct interest on up to two personal residences as long as the total acquisition debt for the two does not exceed the 750,000 limit.

Equity interest, on the other hand, is no longer deductible. It’s important to remember that what determines whether a mortgage loan is deductible under the new law is how the funds were spent and not the title of the loan.  For example: let’s say that you have a 500,000 balance on your mortgage and then you take out an equity line of credit and borrow an additional 30,000.  Let’s say you spend the 30,000 to remodel your home.  In that case the 30,000 spent would qualify as acquisition indebtedness and would be fully deductible.  If you then borrow another 30,000 on that same line of credit and take a vacation with the funds, the interest on that 30,000 is not deductible under the new law.

If you are confused about any provisions in this new law, we would be happy to answer your questions regarding how it will impact your individual situation.

 

CA wildfire victims receive special tax relief for casualty losses

Last fall congress passed a tax bill granting special tax relief for anyone who suffered a casualty loss as a result of the devastating hurricanes that impacted the US in 2017.  In the budget deal agreed to last month, congress has finally extended those same benefits to victims of the California wildfires.

The special tax benefits have to do with being able to deduct a personal casualty loss.  Normally, to deduct a casualty loss you must itemize deductions, the loss has to exceed 10% of adjusted gross income and you then subtract a 100 deductible from the loss.  Here’s an example: let’s say your adjusted gross income is 100,000 and you sustain an economic loss from a casualty of 11,000 dollars.  You would first deduct 10% of AGI or 10,000 and then you would subtract 100 as a deductible so your loss would be 11,000 – 10,000 – 100 = 900.  This 900 would only be a deduction if you itemize deductions on Schedule A.

The special rule for deducting a casualty loss due to the wildfires is that you don’t have to deduct 10% of AGI and you can take the casualty loss whether or not you itemize deductions.  However, the 100 deductible is raised to 500.  So, if the above 11,000 loss occurred as a result of a California wildfire or the 2017 hurricanes you would now calculate the loss as follows: 11,000 – 500 = 10,500 as a deductible casualty loss.  This loss can be taken as an itemized deduction or for those who don’t itemize deductions, the deduction would be added to your standard deduction.

Another important point to remember about casualty losses is that there must be an actual economic loss.  In other words, if you were reimbursed for your loss fully by insurance, you have not sustained an economic loss.  There are a couple of other tax breaks associated with casualty losses that occur in any federally declared disaster area.  For any questions on how to deal with this situation, you can contact us or a competent tax professional such as an Enrolled Agent in your area.

Budget deal changes tax law for 2017 returns being prepared now

This morning President Trump signed into law a new budget deal that ends the very brief government shutdown.  It contains some good news for taxpayers, but a logistical nightmare for the IRS and for tax preparers.  Some tax breaks that expired at the end of 2016 have now been reinstated retroactively for 2017.  These include a deduction for mortgage insurance premiums for certain taxpayers, an exclusion from cancellation of debt income for homeowners, some expired energy related credits are returning and various other provisions.  I will post updates as they become available, but for now here’s a summary of the tax changes that affect 2017.

Now for the nightmare.  There is no place on the current 2017 tax forms to take advantage of these tax savings, which means in the middle of tax season, IRS will have to redesign various tax forms, all tax software will have to be reprogrammed for the changes and then there is the issue of how much time tax preparers have to learn the new changes and let their clients know about them.  Anyone who has already filed but is eligible for one of these retroactive benefits can file an amended return to take advantage of the additional tax savings.  We are available to help with this or any other tax related concerns you may have.

Myths about the new tax bill

There has been a great deal of talk in the media and elsewhere about the new tax overhaul signed by President Trump in late December.  This has included a great deal of misinformation about what the bill actually contains.  Many experts tried to analyze what they thought the bill would contain prior to passage, and others were simply misinformed or mistaken.  Here are some of the common misconceptions I have either heard from clients or seen in the media.

  1. This bill increases taxes on the middle class – The vast majority of middle class taxpayers will get a tax break from this bill.  One good analysis I read showed that the average middle class taxpayer would see a decrease in tax of 8 – 10%.  In reviewing scenarios from my client base, this appears pretty accurate.  The bill has new lower tax rates for virtually everyone but it also eliminates some tax deductions.  It is possible for a middle class taxpayer to have an increased tax by losing more in deductions than they gain from the lower tax rates, but the vast majority of the middle class will pay less tax because of this bill.
  2. Your taxes will be so simple they can be filed on a post card – First off, most taxpayers efile their returns and don’t use any paper.  As for the claim that this bill simplifies taxes, well that depends.  Currently around 35% of taxpayers itemize deductions on Schedule A.  This bill nearly doubles the standard deduction and eliminates or limits other itemized deductions so many taxpayers who have itemized deductions in the past will not be itemizing under the new tax law.  So for those taxpayers there will be one less schedule to file with their taxes.  There are many other changes in this bill which will create new and complex tax planning opportunities, especially for business taxpayers.
  3. Mortgage interest is no longer deductible on my second home or on rental property – Both of those are false.  Elimination of the mortgage deduction was proposed for 2nd homes, but it didn’t make it into the final bill.  There was never any proposal to disallow mortgage interest for rental properties. (even though some of my clients called me on this one)
  4. Businesses will no longer be allowed to deduct any expenses for doing business.  Instead there will be a flat tax on gross receipts – This was never a part of the bill although I did hear this as a proposal before either bill passed the house or senate.  I heard a similar rumor regarding the disallowance of all expenses on rental property.
  5. Charitable contributions are no longer deductible – This is another false one but I heard it from multiple sources.  This bill does eliminate the deduction for certain miscellaneous itemized deductions though.  Under prior law these deductions were allowed if they exceeded 2% of your adjusted gross income.  This includes deductions such as employee business expenses, investment advisory fees, and tax preparation fees.

This bill makes numerous changes to our tax laws.  I will be blogging in the future about some of those changes that most affect my clients.  My advice would be to not rely on anything you hear in the media but contact a competent tax professional such as an Enrolled Agent to discuss any concerns you have regarding the new tax bill.

Another judge rules to hold the IRS accountable

Despite attempts by the IRS, many politicians, and the media to pretend that the tea party targeting scandal did not occur, lawsuits from groups affected by the illegal behavior of the IRS are still continuing.  Judge Reggie B. Walton recently ruled in favor of some of these groups and ordered the IRS to produce more records relating to who was involved and how the scandal occurred.  For more details on how the scandal evolved see here.

Summer Time tax tip

Many clients grumble if they owe taxes at the end of the year.  Now is a good time to do a quick mid-year checkup to see if you are having enough taxes paid in through withholding or quarterly payments.  Here’s a link to an IRS publication that discusses the issue.  If you need assistance in this area, we are here to help.

Scary IRS Notices

No one likes getting mail from the IRS. In recent balance due notices sent by the IRS they are including a paragraph that says at the top in BOLD letters. Denial or Revocation of United States passport.  In December of 2015 congress passed the FAST act which includes a provision allowing for the revocation of a passport for a person with seriously delinquent tax debt.  There are various conditions that need to be met in order to meet the definition of “seriously delinquent tax debt.”  One of those provisions is that the tax debt must exceed 50,000.  Yet, I just got a notice for a client owing $142.64 that included that warning.  IRS notices can be confusing and difficult to understand.  If you need help dealing with an IRS notice you can get competent advice from a tax professional such as an Enrolled Agent to represent you before the IRS.

Former Congresswoman convicted of tax fraud

Corrine Brown, who had represented her district in Florida for nearly 25 years, has been convicted of tax fraud and other charges in connection with a “charity” allegedly set up to provide scholarships to underprivileged youth.  Out of more than 800,000 raised for the “charity”, one scholarship was awarded of $1,200.  Large amounts of the donations were deposited into her personal accounts and those of her associates.  Sometimes tax cheaters get caught.  If you have any questions regarding the tax obligations of legitimate charities, contact a competent tax professional such as an Enrolled Agent or CPA.