The Skinny On The Latest Tax Reform Package – Should You Worry?

November 03, 2017

You’re likely to see lots of headlines in the coming weeks about the tax reform package that Congress will be hashing out, which many are calling the biggest tax overhaul in 30 years. Time will tell if that’s true and should a new tax law be passed, chances are it will look much different from what has been put forth so far.

I personally tend not to worry too much about this stuff until it’s actually law, but I know not everyone works like that, so here are the highlights of what’s being proposed and whether or not you should worry about it.

Mortgage interest deduction

What’s being proposed: A limit on the amount of interest you can deduct.

Should you worry? The limit applies to interest paid on NEW mortgages bigger than $500,000, so if you currently have a mortgage that’s larger than $500k, you’re good. If you were to take out a mortgage in the future that is higher than $500k, you’ll still be able to deduct interest, the amount would just be capped at the interest on the first $500k.

FYI, the current law caps the deduction at $1 million worth of mortgage debt.

Student loan interest deduction

What’s being proposed: Eliminating the deduction altogether.

Should you worry? If you currently have adjusted gross income over $80k ($160k if you’re married), then you already miss out on this deduction. If you’re just starting out in your career and paying down big loans, yes, this could affect your taxes. Depending on your tax bracket and total interest paid, this could cost you up to $625 in taxes. (keep reading though, this could be made up for with other changes)

Want to figure out more closely what it would cost you? Here’s how:

If you’re single and you make more than roughly $37k per year, then take the amount of student loan interest you actually paid (you can find this by logging into your loan service provider) and multiply it by .25. That’s about the amount you save on taxes with this deduction. Same process if you’re married and make more than about $75k combined.

If you make less than those thresholds, then just multiply your interest by .15 to get your number.

State and local tax deduction

What’s being proposed: A limit on the amount of state and local taxes you can deduct, including property taxes.

Should you worry? If you pay more than $10,000 per year in combined property and state income taxes, you could see your taxable income rise should this provision pass. The good news is that there are some powerful Republicans from states with the highest income tax rates who are likely to fight this on behalf of their over-taxed constituents. The fact that next year is an election year will play to your favor if this is an important deduction to you.

Alimony and moving expense deduction

What’s being proposed: Eliminating the deduction altogether.

Should you worry? If you pay alimony or were counting on a tax deduction to help fund a work-related move, then yes, you should worry. If you receive alimony, this will actually help you because you would no longer have to claim it as income.

Medical expense deduction

What’s being proposed: Eliminating the deduction altogether.

Should you worry? Most working people with decent insurance coverage aren’t able to deduct out of pocket medical expenses anyway, due to the law requiring that expenses must exceed 10% of your adjusted gross income before you can deduct it. Older Americans (who have a lower threshold and likely higher expenses), however, may suffer with this provision.

Is there any good news?

One of the goals of this package is to simplify the tax code, which is why a lot of deductions are going away. To make up for that, there are some positive changes proposed as well.

One thing that could help, especially for people who don’t itemize (and therefore don’t care about the mortgage and other tax deduction loss) is that the standard deduction is slated to practically double to $12,000 for individuals (currently $6,350) and $24,000 for families (currently $12,700). In other words, if you’re worried about losing your student loan interest deduction, the loss could more than be made up for by this larger deduction. The proposal also includes lower tax brackets for most of us, which is also good news.

One thing that wasn’t included, that many people thought was on the chopping block, are changes to the treatment of 401k contributions. Unless something gets slipped back into the final package, we can continue to contribute up to $18,000 in pre-tax money plus an additional $6,000 if you’re 50 or older. Even better news, that limit is getting bumped up to $18,500 for 2018.

“Worrying is like paying interest on a debt that never comes due”

The best thing you can do at this point to help your situation would be to let your congressional representatives know how you feel about these proposals. There will likely be organized efforts around some of these issues, so join in if it’s important to you.

There are obviously lots of other changes proposed in the proposed law that our representatives in Congress are working on, but those are the ones most likely to cause confusion and/or directly affect many of us “everyday” working folks. Time will tell what the final result will be. If I had to wager a guess, I’d say we probably won’t know much before Santa starts making his rounds.

 

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What Qualifies as Deductible Mortgage Interest? (The Answer Might Surprise You)

March 22, 2017

When it comes to being able to deduct the interest you pay on a mortgage, most people correctly assume that this applies to a home that you use as your primary residence. (There are some wonky rules around limits on the deductibility of certain types of mortgage interest from home equity loans or loans in excess of $1 million, which are best explained by Figure A on this page.) But many are surprised to learn that they may also be able to deduct interest paid on a second home and are even more surprised when they learn what the IRS considers a “qualified home.” Generally speaking, in order to be considered a home, a property must have sleeping, cooking and toilet facilities.

This means a boat, camper, or even a tricked out old ambulance could qualify as long as it has a bed, a stove and a toilet on board, and as long as any loan you took out to purchase the property is secured by the actual property. In other words, if you used a credit card to buy that fancy yacht, you can’t deduct the interest you pay on your card. But if there is a loan document that you signed that basically collateralizes the boat/home (aka if you don’t pay the loan back, the lender can repossess the property and sell it to satisfy the debt), it’s a mortgage and the interest is technically tax deductible. In most cases, the lender will send you a Form 1098 showing how much interest you paid. That’s one clue that you have an actual mortgage.

Another surprising aspect of the rule is that you don’t have to live there full time. In fact, you don’t even have to use it at all during the year as long as it’s not rented out. Note that if your second home is rented out, you may still qualify to deduct the interest. You just have to use it more than 14 days or more than 10% of the number of days it is rented, whichever is longer. If you don’t meet that qualification, you may still realize a tax benefit from interest paid, but it will be applied against the rental income you generate.

You shouldn’t go out and buy a second home, boat or RV you can’t afford just for the tax deduction, but it is worth knowing, especially if you’re looking into buying a second home for your future retirement or just a place to vacation throughout the years. If you’re thinking of taking out a loan to buy a boat or RV, make sure you shop around to get the best rates. Dealers often offer financing deals, but it’s worth it to double check that your bank or credit union can’t offer you a better deal. You can use this mortgage loan comparison tool to compare up to 3 loans and see which is the best financial deal.

 

Kelley Long is a resident financial planner with Financial Finesse, the leading provider of unbiased workplace financial wellness programs in the US. For more posts by Kelley or to sign up to have her weekly post delivered to your inbox each Wednesday, please visit the main blog page and sign up today.

 

Is Paying Off Your Mortgage Worth Losing The Tax Deduction?

March 12, 2015
Updated June 14, 2017

I recently received a question after one of my workshops from a woman who was wondering if she made a mistake paying her mortgage off early because she no longer has the mortgage interest deduction. I can’t tell you how many times I’ve gotten different versions of that same question (including after a later workshop session that same day). Here are several reasons why this is a classic case of letting the tax tail wag the dog: Continue reading “Is Paying Off Your Mortgage Worth Losing The Tax Deduction?”

4 Financial “Myths” Than Can Actually Help You

August 22, 2013

I recently read this blog post on Forbes called “4 Financial Myths Than Can Hurt You.” Sounds interesting doesn’t it? Who doesn’t want to bust some myths that could be hurting you financially? The problem is that in trying to dispel these myths, the author perpetuates some of his own. Let’s take a look at each “myth.” Continue reading “4 Financial “Myths” Than Can Actually Help You”

Is it the Right Time to Buy a Home?

June 21, 2012

With both home prices and mortgage rates still near historic lows, is now the right to buy a home? That’s a question many would-be first time home buyers are asking themselves, myself included. For most of the first few years of my career, I was working on a full-commission basis and my unstable income and need to maintain a large savings account balance made me reluctant to commit to the upfront costs and monthly mortgage payments associated with home ownership. By the time my income was more stable, I was living in NYC, where buying just didn’t make sense to me, and then I was in law school with barely any income at all. As a result, I missed both the rise and the collapse of the real estate bubble. Continue reading “Is it the Right Time to Buy a Home?”