By Patrick Stark, CFP®
On December 22, 2017 the Tax Cuts and Jobs Act was signed into law. In an interview with RS Crum’s, Pat Stark, he addressed some frequently asked questions to help you understand some of the main provisions of the new law. And, how the changes will affect you and your family.
Let’s cut right to the chase. Are my taxes going to go down?
It depends. Most individuals will see their taxes go down slightly, some will see little change, while others will see an increase.
Who will see an increase?
Primarily people who live in high tax states such as California and New York who own expensive real estate. There are new limits on how much state tax and property tax can be deducted, and this will have a significant detrimental effect on homeowners in high tax states.
When is the law effective?
Most of the provisions are effective as of January 1, 2018.
So does that mean that my 2017 tax returns that are due in April 2018 will follow the old rules?
Yes. You will be using the new rules when you file in April 2019.
Is this law permanent?
No, the new law expires on December 31, 2025. If this law isn’t extended by Congress, most of the rules revert back to the previous law.
That’s kind of silly. Why didn’t they make it permanent?
The details are complicated, but it has to do with rules that allowed the Senate to pass the bill with a simple majority rather than 60%. Welcome to politics!
I saw some members of Congress flashing 3” x 5” index cards, implying that the tax code was going to be so simple that we could do our taxes on them. Is that really the case?
For most people, no. Unfortunately, the tax code remains as complex as it was previously.
I heard that this tax law repeals Obamacare. Is that true?
No. What it does is remove the individual mandate, which is the requirement that people carry a minimum level of health insurance or pay a penalty. This is one of the few provisions that does not expire in 2025 – it is permanent.
OK, so what are the main things that I should be aware of?
Here are some of the highlights:
Income tax rates were reduced.
- Rates for six of the seven tax brackets were reduced.
- Implication: Lower taxes.
State tax and property tax deductions are now limited.
- Deductions for state income tax plus property tax are limited to a maximum of $10,000.
- Implication: Higher taxes – this is where California gets hit hard. Our state income tax rates are among the highest in the country. Our high real estate valuations generally translate into high property tax bills as well. Limiting this deduction to $10,000 severely limits this deduction for Californians, especially property owners.
The standard deduction was increased.
- The standard deduction was increased to $24,000 for a couple and $12,000 for an individual.
- Implication: Since the new amounts are almost double the previous amounts, fewer people will itemize their deductions. When combined with the $10,000 limit on state and property tax deductions, many people in California will find themselves utilizing the standard deduction instead of itemizing.
The home mortgage interest deduction was changed.
- The previous law allowed homeowners to deduct the interest on up to $1 million of home acquisition debt, plus an additional $100,000 of home equity debt. This is now being reduced to $750,000 for home acquisition debt, and interest on home equity debt is no longer deductible. This provision does not apply to mortgages taken out before December 15, 2017.
- Implication: Scary at first glance for homeowners in high priced real estate markets. But this provision only applies to mortgages taken out on or after December 15, 2017, so the impact will be muted.
- And since it eliminates the ability to deduct interest on home equity debt (for new mortgages only), it may eventually provide an incentive for people to stop using their home equity as an ATM.
The child tax credit was increased.
- This credit is being increased from $1,000 to $2,000. The income range at which this credit phases out is also being increased.
- Implication: Lower taxes if you have kids under 17.
Should I take any actions because of this new tax law?
We recommend that our clients meet with their tax professionals to understand how the new tax law impacts them specifically. It may be appropriate to change tax withholding, modify estimated tax payments, or make other changes because of the new law. While we welcome subsequent discussions and questions, we believe that it’s critical to rely on your tax expert for final recommendations.
OK, enough of this boring tax stuff. We know that you’re a Raiders fan. What do you think of Jon Gruden coming back to coach the team?
I have mixed feelings. The Gruden years were some of the most exciting in Raiders history and I was crushed when he was traded (yes, a coach was actually traded!) to Tampa Bay in 2002. But I was sad to see the departure of Jack Del Rio, who is a great coach and had a huge positive impact on the Raiders organization.