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Can you give a brief refresher on the Tax Cuts and Jobs Act?

What is gone?

  • Almost all miscellaneous deductions are dropped. For 2018, it will no longer matter if you have moving expenses for a new job, have unreimbursed employee expenses, get tax preparation advice, or a safety box.
  • Personal exemptions are also gone, while the standard deduction has doubled to $24,000 for couples and $12,000 for individuals.

What has changed?

  • For people in high tax states, what may be most crucial is that there is now a $10,000 cap on what you can deduct on your federal tax return for everything from property taxes to state income and sales taxes.
  • If you bought a home in 2018 only mortgage interest on debt up to $750,000 can be deducted. In the past the limit was $1 million and that still applies to previous purchases.
  • For home equity loans or lines of credit you can no longer deduct interest unless you used the money to buy, build, or improve your home. Even borrowing to pay for college will not be deductible. The new rules apply even if you took out the loan before this year.
  • Losses from fires and storms are generally no longer deductible. Watch for permitted losses from hurricanes through specific designations as “presidential declared disaster areas.”
  • Although itemized deductions were slashed one became better. The medical expense threshold for 2018 went back down to 7.5% from 10% of adjusted gross income.

What has new impact?

  • Selling stocks, bonds, mutual funds, and real estate that have gained value in taxable accounts can increase your taxable income, so trying to alleviate the impact of capital gains remains a smart strategy.
  • This year the cutoffs for capital gains rates are no longer in sync with tax brackets, so pay attention to income cutoffs. For the zero percent capital gains rate, which allows you to sell an investment you have owned for at least a year (a long-term capital gain) without paying tax. Singles can have incomes up to $38,600 and couples up to $77,200.
  • Once above that, long term capital gains rates jump to 15 percent, 20 percent, and 23.8 percent. Yet investors can reduce, or eliminate, capital gains taxes by selling an investment that has declined in value since it was purchased.
  • While no investment should be sold for tax reasons alone, if a person can harness the zero percent rate now and expects higher income in the future, consider selling.

What remains?

  • Teachers who spend $250 in their classrooms can still file an “above the line deduction’, even though most others were wiped out. Also, disabled people traveling to work, and military people going 100 miles or more from home and staying overnight can still claim deductions.
  • If you pay alimony you can continue to deduct the payments from income. If you receive alimony you still must claim it as income. But for any divorce that happens in 2019 or later this goes away. So finalizing a divorce before year end may mean harnessing a deduction that is going away.

What should we be aware of?

  • There are winners and losers in this tax act, but the withholding rates assume you are a winner. So in many cases withholding has been reduced but the taxpayers tax has not. They may owe money.
  • Carefully review your withholding against your projected tax to prevent an unfavorable surprise.