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Now that I have filed my tax returns for the year 2017, I have had the time to really examine some of the new tax law changes signed last December by the president. Many of the big items have been written about quite a bit like the lower income tax brackets and the projected overall tax savings for almost all taxpayers (particularly for the wealthiest people). But are you aware of some of the other provisions and changes in the new law? Provisions that just might affect you on a grand scale that you may not have heard about at all!
If there is any good rule of thumb about taxes and your money it’s this: Always plan your tax strategies ahead in order to maximize your income and minimize your taxes.
In 2014, about 30% of all Americans itemized their tax deductions. With all of the hype that is being bandied about when it comes to reducing your taxes and increasing your standard deductions, there are numerous changes to other long-standing deductions and the jury is still out as to exactly how much low- and middle-income earners will really benefit by the new law.
Now is a really good time to think about things that might just be very important to you when you file 2018’s income tax returns in early 2019. Here are some of those important changes in tax deductions that are now in the law and it may have you thinking twice about the “rosy” prospects of the new income tax law.
11 New Tax Law Changes
1. The home equity loan interest deduction has been wiped out
A home equity loan is one in which your property serves as collateral on the amount you borrow. It used to be that the interest paid on home equity loans was deductible for loans worth up to $100,000, but going forward, home equity loan interest won’t be deductible at all. This is potentially a huge blow to homeowners, particularly those with existing loans who were counting on that tax break. That’s because loans signed prior to 2018 are not being grandfathered into the old system; rather, they’re treated the same as new loans. This means that the easily available equity that you probably have available in your home right now will not be as attractive to borrow against if you ever really need it.
2. The moving expense deduction for a new job is now eliminated
It used to be that if you relocated for job purposes, you could deduct expenses associated with that move. The only catch was that your new job needed to be at least 50 miles away from the distance between your old home and old job, and you worked at least 39 out of the 52 weeks after you moved.
If you met those criteria, you could deduct the cost of everything from hiring movers to paying for storage units. But now, this tax break has been eliminated!
What that means for you is that if you’re planning a work-related move, you may want to negotiate with your employer to cover at least a portion of your expenses. If not, plan on some huge costs for accepting a job not in your commuting range that may take years to pay off.
3. Unreimbursed job expenses deduction goes “bye-bye”
It used to be that when you incurred job-related costs that your employer didn’t, you could deduct those expenses provided they were directly related to your work and they, along with other miscellaneous deductions, totaled more than 2% of your adjusted gross income (AGI). That’s no longer true beginning this year.
For example, many fields require you to maintain a professional license or certification at your own expense, while other jobs require you to purchase certain equipment that you pay for yourself. Going forward, however, such unreimbursed job expenses are no longer deductible, so if you’re facing a host of them, you will have to try appealing to your employer to help share in that burden.
4. Investment fee deduction is history
Prior to 2018, you had the option to deduct fees paid to a financial advisor provided that they, along with other eligible miscellaneous expenses of yours, exceeded 2% of your AGI. But as is the case with unreimbursed job expenses, the option to deduct investment fees no longer exists. The fees will now be 100% yours and if the fees you’re used to paying relate specifically to commissions, you’re now out of luck.
Those commissions can still be applied to the cost basis of your investments and if you sell them at a profit, they can be used to reduce your capital gains. But any advisory fees you were charged won’t help you at all from a tax perspective.
And just a note about advisory fees…even just a 1% increase can have a significant impact on your retirement savings or other investments. You might want to try investing in index funds at a low-fee provider like Vanguard.
5. The alimony deduction is going away…for some
The old tax laws allowed alimony payments as tax-deductible for the ex-spouses responsible for making them. They also were counted as income for those who received the payments. That’s now changing and alimony payments will no longer be deductible or counted as income.
However, if you’re already paying or receiving alimony as part of a divorce agreement, this change won’t impact you. But anyone who signs a divorce agreement after December 31, 2018 will be subject to these new rules.
6. Casualty and theft loss deductions are knocked out
If your property sustained damage due to a flood or fire or you had a piece of valuable artwork stolen, it used to be that you could claim an income tax deduction for any such personal losses. The only provision was that the loss must exceed 10% of your AGI. But beginning this year, you can no longer claim this deduction unless it’s associated with a federally declared disaster area such as would be the case in an area hit by a major hurricane or flood like the hurricanes we saw in 2017.
7. Deduction for fees you pay for your tax return preparation disappears
Thinking of hiring a tax professional this year? If you need the help, by all means you have to go for it—but know that you won’t snag a tax break in the process. That’s because tax preparation fees fall under the same miscellaneous fees deduction we have just talked about—a deduction that got chopped going into 2018.
Of course you can always file your tax returns on your own using a program like TaxAct to help.
8. Business entertainment expense tax deductions are erased
There are several aspects of the new tax laws that are designed to benefit businesses, but entertainment expenses are one place they might lose out.
It used to be that if you took a client out for business purposes, whether to an event or a restaurant, you could deduct 50% of the cost on your taxes. Going forward, however, the option to deduct expenses related to business meals and entertainment will no longer exist. Meal expenses that you incur when you are traveling yourself for business travel can still be deducted at the 50% rate.
9. State and Local Sales Tax deductions get limited
Though the SALT (state and local tax) deduction has not disappeared completely, it looks very different in 2018 compared to years prior. That’s because the deduction used to be unlimited, thus allowing filers in states with high income and property taxes to shave quite a bit of money off their IRS bills. Effective this year, however, the SALT deduction is capped at $10,000, and while that’s certainly better than nothing, it does put a sizeable number of taxpayers at a big disadvantage.
10. Mortgage interest deductions are reduced
The new law now will cap your income tax deduction for your mortgage to the first $750,000 of debt and not the previous $1,000,000 maximum on your first or second home. It also caps your state mortgage interest deduction now to a maximum of $10,000 per year.
11. Roth IRA conversions are repealed
While it doesn’t quite affect tax deductions if you have a Roth IRA (you still pay taxes when you create one), the old law that allowed you to convert a Roth IRA into a traditional (tax deferred) IRA is now repealed.
It hasn’t been easy digging into the new tax law and the many changes it has made to what were traditional and long-standing rules. These changes in total may help your personal tax picture, but for some it may not. In fact, many of these deductions are ones that I have always used to reduce my tax burden, and in most cases these deductions were considered basic and safe.
It’s even more important now than ever before to try to calculate what your proper withholding should be so that you do not find yourself in the position of having under-withheld or over-withheld monies from your paychecks. You don’t want to lend our government an interest free loan that they will gladly refund to you after a year, nor do you want to find yourself paying unplanned taxes and penalties for being short on your payments.
Of course, the dramatic increase in the standard deduction (up to $24,000 is possible depending on your filing status) can mean that you have nothing to worry about here. But only time will tell when the day of reckoning arrives in April 2019!
Where are you on your 2017 tax filing right now? Have you thought about the new tax law changes and how they might affect you next year? What have you done or can you do to make 2018’s tax filing work to your advantage?