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08 January 2018

Virginia Beach Tax Law Changes 2018My plan is to write a new article for this tax blog at least once a week. It doesn’t always work out that way. Some interruptions to this plan are predictable. For example, I anticipate my blogging schedule will get interrupted during tax filing season (mid-January to mid-April). But this year the interruptions came earlier than expected. One thing that happened is that all my children came home for Christmas – that was a happy interruption.

There were a few others, too, but the biggest interruption (disruption?) I encountered is that just before Christmas something happened I was not anticipating – our federal government accomplished something. Both houses of Congress passed tax reform bills, they worked out the differences in a joint conference, and put a bill in front of the President – who signed it! (It was almost as if there was no dysfunction in Washington for a few days.)

Time will tell if this something our government accomplished with the new tax laws was a good thing or a bad thing. There were quite a lot of changes in the tax law, and I suspect we will ultimately judge some to be good and some to be bad. But since these changes are in effect NOW, people (like me) who plan tax strategies aren’t too keen on waiting to see how things work out in the long run. We need answers now to be able to plan and make strategies.

I have been reading (and reading and reading…) about this new tax law. I have a reasonably good understanding of it now, but there are some things that are just not yet knowable. The IRS has not yet had time to develop rules, forms, and instructions for the implementation of the new laws Congress handed them. The manner in which the IRS implements the changes will have a significant impact on future strategy.

Knowing that more is yet to be revealed, I still want to get some practical information about the new changes in this blog. I have received enough phone calls in the past few weeks to know there is an appetite for it. Instead of trying to eat the entire elephant I am going to stick to the issues I think will be of most interest to my clients and readers. These are the topics with which my clients have dealt with, or may need to deal with in the future. So, without further ado, here is my take on the provisions in the new tax law that will likely have the greatest impact on my clients. Remember, these are new rules for 2018. These changes will not impact the tax return you are about to file for 2017.

  1. Personal Exemptions are gone. Previously you could subtract around $4,000 for each person you claimed on the tax return. This will no longer be the case starting in 2018. The new law compensates for this change by increasing the standard deduction and increasing and expanding the child tax credit.
  2. Increased standard deduction. The standard deduction has nearly doubled. This means that significantly fewer taxpayers will itemize their personal deductions. (This was the ‘simplification’ some politicians spoke of when discussing tax reform.) It is still legal to do either. You may claim the standard deduction or you may itemize your personal deductions. We will do whichever is most advantageous to the taxpayer. The increased standard deduction (coupled with lowered itemized deductions, explained later) means it will now be more advantageous for more people to use the standard deduction.
  3. Lower itemized deductions. Personal deductions are itemized on Schedule A. Many of the deductible items on Schedule A have been eliminated or limited.
    1. Mortgage interest on new mortgages for your personal residence (first and second home) is now limited to the first $750,000 borrowed. (This is down from $1,000,000.) Mortgages existing before December 15, 2017 are grandfathered at the $1,000,000 limit.
    2. Interest on home equity loans is no longer deductible just because the loan is secured by your residence. My recently written (and brilliant) article on interest tracing rules should be reviewed. Just be aware that home equity loans and lines of credit are now going to be subject to the interest tracing rules and not exempt from them. No grandfathering provisions were made for existing home equity loans.
    3. State and Local Tax Deduction limited to $10,000. These are your state income taxes, real estate taxes, and personal property (car) taxes. The limit for all these taxes combined is now $10,000. There was no limit to this deduction previously, so this will have a fairly significant impact to the people who itemize their deductions.
    4. Deductions for unreimbursed employee expenses – gone. Taxpayers used to be able to take deductions for expenses they incurred for being an employee. As I wrote about (again, brilliantly!) just a few months ago, these deductions were subject to a 2% of adjusted gross income (AGI) threshold. There were some exceptions made for military personnel, but these deductions are largely gone now.
  4. Expanded 529 Plan Usage. Named for Section 529 of the internal revenue code, state-run 529 programs (such as the Virginia 529 Program) have provided Americans a way to receive tax benefits for saving and paying for college. The new tax law expands the 529 program to allow families to use money in their 529 plan to pay for K-12 education as well. Up to $10,000 per year of 529 money can be used for expenses associated with K-12 education, even at private and religious schools.
  5. Provisions that will directly impact Real Estate Investors:
    1. Bonus depreciation increased to 100% on properties (tangible pesonal property - a.k.a "stuff" - not real property) with less than 20-year useful life. Landlords are frequently dealing with replacing appliances, carpeting, and other items of personal property. In the past this property could not be expensed in the current year, but had to be depreciated and expensed over multiple years. With 100% bonus depreciation real estate investors can deduct the entire cost of many properties. This includes USED property. Previously the bonus depreciation rules were 50% and only applied to NEW property.
      1. Note 1 – Buildings have a useful life of more than 20 years and are not eligible for bonus depreciation.
      2. Note 2 – This is accelerated depreciation, NOT a pure write off. If you sell the property before it has fully depreciated, you must pay back the excess depreciation expense to the IRS.
    2. 20% deduction on pass-thru income. Taxpayers receiving income as pass-thru from another source (Schedule C, Schedule E, a partnership, or an S-Corp) are entitled to deduct 20% of that income before figuring their taxes. Of all the parts of this new tax law this is the topic on which I’ve read the most, but understand the least. Along with phase outs for the deduction, there are also multiple ways to calculate it. Strategizing on this new tax break situation is also going to depend heavily on the IRS implementation rules – which we will not see for months. For now the best I can tell you is the deduction is there, I think it will be helpful in reducing taxes for some people, and I am waiting for additional information before I recommend a strategy to capitalize on this new tax provision.

That’s where I am going to stop. It’s already a lot to process, and I am just scratching the surface of the tax law changes. The actual document is 1097 pages long, so it will take a lot of smart people a long time to fully digest it.

Fortunately, we have a year to ease into the changes. If new strategies arise during the year you can expect to hear from me. If you have questions, please contact me or ask during your tax prep appointment. I look forward to seeing you this year!

 

 

Disclaimer

Information in the Tax Blog is current as of the day it was posted. Tax laws change frequently, and it is likely that as time passes acts of Government will make some of the older blog content out of date.

The information provided is for education purposes only. It is general in nature and may not pertain to the Reader's situation. Every taxpayer's circumstances are unique. Reader's are urged to do some research or talk to a tax professional before acting on any of the information posted in this blog.

Paul D. Allen is a proud member of the National Association of Enrolled Agents, the National Association of Tax Professionals the Financial Planning Association of Hampton Roads, the National Association of Personal Financial Advisors (NAPFA), and The Tidewater Real Estate Investors Group. You can read more about Paul's background here.

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Common Acronyms

ACTC - Additional Child Tax Credit

AGI - Adjusted Gross Income

AMT - Alternative Minimum Tax

APTC - Advanced Premium Tax Credit

AOC - American Opportunity Credit

CTC- Child Tax Credit

EIC - Earned Income Credit

HoH - Head of Household

LLC - Lifetime Learning Credit

MFJ - Married Filing Jointly

MFS - Married Filing Separately

MAGI - Modified Adjusted Gross Income

PIM - Plan of Intended Movement

PTC - Premium Tax Credit

QC - Qualifying Child

QHEE - Qualifying Higher Education Expenses

QR - Qualifying Relative

QW - Qualifying Widow(er)

 

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