The Tax Cuts and Jobs Act (TCJA) was passed by Congress in a hurry late last year, and the IRS has been working to implement the changes for 2018. Here are the latest answers to some of the most common questions about the tax overhaul:
·
Is home equity interest still deductible?
The
short answer is: Not unless you've used the money to buy, build or
substantially improve your home.
Before the TCJA, homeowners were able to take
out a home equity loan and spend it on things other than their residence, such
as to pay off credit card debt or to finance large consumer purchases. Under
the old tax code, they could deduct interest on up to $100,000 of such home
equity debt. The TCJA effectively writes
the concept of home equity indebtedness out of the tax code. Now you can only
deduct interest on "acquisition indebtedness," meaning a loan used to
buy, build or substantially improve a residence. If you took out a home equity
loan pre-2018 and used it for any other purpose, interest on it is no longer
deductible.
·
I'm a small business owner. How do I use the new 20 percent
qualified business expense deduction?
Short answer: It's complicated.
Certain small businesses structured as sole
proprietors, S corporations and partnerships can deduct up to 20 percent of
their qualified business income. But that percentage can be reduced after your
taxable income reaches $157,500 (or $315,000 as a married couple filing
jointly). The amount of the reduction
depends partly on the amount of wages paid and property acquired by your business
during the year. Another complicating factor is that certain service industries
including health, law, consulting, athletics, financial services and accounting
are treated differently. The IRS is
expected to issue more clarification on how these rules are applied, such as
when your business is a mix of one of those service industries and some other
kind of business.
·
What are the new rules about dependents and caregiving?
There are a few things that have changed
regarding dependents and caregiving:
- Deductions. Standard
deductions are nearly doubled to $12,000 for single filers and $24,000
for married joint filers. The code still says dependents can claim a
standard deduction limited to the greater of $1,050 or earned income plus
$350.
- Kiddie Tax. Unearned income
of children under age 19 (or 24 for full-time students) above a threshold
of $2,100 is now taxed at a special rate for estates and trusts, rather
than the parents' top tax rate.
- Family credit. If you have
dependents who aren't children under age 17 (and thus eligible for the
Child Tax Credit), you can now claim $500 for each dependent member of
your household for whom you provide more than half of their financial
support.
- Medical expenses. You can deduct
medical expenses higher than 7.5 percent of your adjusted gross income as
an itemized deduction. You can claim this for medical expenses you pay
for a relative even if they aren't a dependent (i.e. they live outside
your household) as long as you provide more than half of their financial
support.
Stay
tuned for more guidance from the IRS on the new tax laws, and reach out if
you'd like to set up a tax planning consultation for your 2018 tax year. If
you have questions, call us at (219) 769-3616 or email them to tlynch@swartz-retson.com.
