How the New Tax Law Could Impact You
By Samantha Webster
In December, our team compiled an overview of the various provisions found within the Tax Cuts & Jobs Act of 2017.
The new tax legislation brought about significant changes to several areas of the federal tax code, some of which could impact you and your family.
Although the tax legislation is far-reaching and nuanced, one of the key themes of the new law is increasing the standard deduction while phasing out certain itemized deductions. Single filers can now claim a $12,000 standard deduction; $24,000 for joint filers.
As such, we would like to take the opportunity to hone in on three specific itemized deductions that have been reduced – mortgage deductions, state and local tax (SALT) deductions, and medical expense deductions.
These particular changes to the tax bill could influence the approach you take when filing your 2018 tax return, as well as the financial decisions you make throughout the course of the year.
Important: Several areas of the new law were implemented on a “sunset provision” basis, meaning that the changes will revert to previous levels at the end of 2026 unless Congress reauthorizes the provisions.
Mortgage Deductions
For many Americans, becoming a homeowner is seen as an integral part of the American dream. Owning a house is not only a source of pride and stability, but your home is also a key asset that constitutes a considerable proportion of your net worth.
Owning a home also carries substantial tax benefits in the form of deducting mortgage debt interest from your individual tax return.
What Changed? – Prior to the new tax law, homeowners could deduct interest on up to $1 million in mortgage debt on their primary residence, as well as deduct interest on up to $100,000 in a home equity line of credit (HELOC).
Under the new tax law (effective December 14, 2017), homeowners may deduct interest on up to $750,000 in mortgage debt on the primary residence. The HELOC deduction has been eliminated entirely.
The changes to mortgage and HELOC deduction caps were passed as a “sunset provision” and will be reverted to their previous level in 2026 if Congress does not reauthorizes the new thresholds.
Who Is Impacted? – Anyone who took out a mortgage after December 14, 2017, will be subject to the $750,000 mortgage interest deduction cap. If you purchased your home prior to this date, the $1.1 million in deductions are still available to you.
The Bottom Line – Since the vast majority of homes in the U.S. are valued at under $750,000, the change should not directly impact most homeowners.
However, the new tax law may reduce the incentive for potential homebuyers to take out a mortgage that exceeds the $750,000 threshold. Also, homeowners who were considering whether to sell a house that is valued at more than $750,000 may opt to hold off until the deductions are reverted to previous levels in 2026.
These two factors could increase competition over an already limited supply of homes valued under $750,000 – which could cause home equity to rise for these residences, while also boosting the appeal of renting over buying for potential first-time homebuyers.
Lastly, homeowners may be more hesitant to open a home equity line of credit for a second mortgage or when refinancing their house.
State and Local Tax Deductions
Across the U.S., there is a great disparity between both states and cities in terms of the taxes you owe. Whereas Florida and Texas have no state income taxes, people living in Manhattan are faced with hefty taxes from both New York State and New York City.
The state and local tax (SALT) deduction provides some relief to residents of high-tax, high-cost areas of the country on their federal tax returns.
What Changed? – The old tax code allowed you to deduct all property taxes paid to your state and local government from your federal tax return. Income or sales taxes paid at the state or local level were also eligible to be deducted from your federal taxes.
The new law mandates that the amount of state and local taxes you may deduct from your federal taxes will be capped at $10,000 per household. This limitation applies to both individual and joint filers.
As with the changes to mortgage deduction thresholds, the new SALT deduction cap will sunset in 2026 if Congress does not reauthorize.
Who Is Impacted? – Residents of high-tax states (e.g. New York, California, Connecticut) and residents of coastal cities where property values and cost of living are high (Boston, Seattle, Washington, D.C.) will bear the brunt of the federal tax liability that results from the SALT deduction cap. This is especially true for people whose combined mortgage and SALT itemized deductions exceed the new standard deduction.
People residing in areas where taxes and cost of living are relatively low will see little (if any) impact on their federal taxes as a result of this provision.
The Bottom Line – For many residents of New York and the other high-tax states/cities listed, $10,000 may not cover the full amount of your property taxes – let alone other state and local taxes you have paid.
Although state legislatures in New York and California are brainstorming new ways to circumvent the added federal tax burden on their constituents, it appears that – for now – residents of the high-tax coastal states will be left picking up the tab.
Medical Expense Deductions
Given the skyrocketing cost of health care, it is reassuring to know that a portion of your annual out-of-pocket medical expenses may be deducted from your federal taxes.
What Changed? – For your 2017 tax return, you could claim an itemized deduction for out-of-pocket medical expenses that exceeded 10% of your adjusted gross annual income.
The new legislation allows you to deduct out-of-pocket medical expenses that exceed 7.5% of your adjusted gross annual income for the year 2018 only. By lowering the threshold, you can deduct more medical expenses from your taxes. Without Congressional reauthorization, the floor will be raised back to 10% in 2019.
Who Is Impacted? – People with substantial medical bills (relative to their income) – especially those with chronic illnesses or disorders that require continual care – will be able to deduct a larger share of their medical expenses. In particular, those who are in poor health and do not yet qualify for Medicare would receive the greatest assistance in 2018.
If your medical costs are less than 7.5% of your income, there is no added benefit.
The Bottom Line – The new tax law provides a welcome gift – albeit fleeting – to Americans who are plagued with hefty medical bills. The medical expense deduction could help to temporarily alleviate the financial strain on these families – potentially offsetting any increases in insurance premiums that might occur in 2018.
Although these tips provide you with a more detailed understanding of three particular provisions in the new tax law, you should review your unique circumstances with your advisor before making any substantial life changes (selling a home, undergoing a major medical procedure, etc.) to determine the best opportunities for tax relief.
Our CAS team is constantly monitoring any proposed legislation that could impact your financial wellness, and we will continue to keep you abreast of any pertinent topics that might affect you and your family.
