Taxes: By the Numbers
Wayne Janus, President of the Financial Planning Practice at Whitnell, an Affiliate of Associated Bank, considers himself a “tax problem solver.” Tax problems, as well as run-of-the-mill questions— and even large-scale frustrations— are commonplace among taxpayers at the beginning of each new calendar year, as the mid-April deadline for filing federal and state income taxes looms.
The Tax Cuts and Jobs Act, passed in December of 2017, has left many people with questions— particularly as they work to file this year’s taxes—about what the implications will be next year when the changes take effect.
Since the typical tax deadline of April 15 falls on a Sunday this year, the deadline to file is actually April 17. One thing to keep in mind is that changes won’t go into effect until next year.
In 2019, confusion might resurface, particularly pertaining to the element of the legislation that does away with or limits most itemized deductions.
$10,000 Tax Deduction Total for Property and Income Taxes
“Next year, it’s a whole different ballgame, because most of the itemized deductions have been eliminated,” Janus said. “Most people that itemized— when I say most, more than half— will be claiming the standard deduction because so many deductions have been eliminated or have shrunk.”
“For example, the real estate taxes and the state income tax, the limit is $10,000 in total,” Janus said. “So if you paid $8,000 in real estate taxes and $9,000 in state income tax, that’s $17,000, [but] you can only deduct 10 [thousand].
With this $10,000 cap, many will likely opt to go standard versus itemized – especially those who rent their homes.
“Now, they’re [also] giving you a standard deduction of $24,000 if you’re married, and so if your taxes are limited to 10 [thousand], in order to even itemize, you’ve got to come up with another $14,000 of deductions, [with] mortgages and charitable contributions being the two most likely,” Janus said. “But if you don’t have a mortgage— in fact, if you rent a home—[it’s] pretty hard to get to $24,000 of itemized deductions. Most people that rent, they’re probably going to take the standard deduction.”
500 Pages of Legislation and a 22-page Letter
Janus notes the level of complexity of the new tax bill means it’s still being interpreted.
“I remember going through this, because in year-end planning for last year, lots of issues came up,” Janus said. “You had the House version, the Senate version and [then] the actual law is over 500 pages long.”
Simply deciphering all that’s mandated in the legislation is proving problematic.
“[Therefore,] the AICPA (American Institute of Certified Public Accountants) issued a letter to the [U.S. Department of the] Treasury, a 22-page letter, asking the Treasury to explain some of these terms that are in the law,” Janus said. “So there’s uncertainty about what it even means, and that stands today,” Janus said. “We don’t know what some of these provisions mean; we’re asking for definitions, we’re asking for how these things apply.”
“A good example of that is that the law said that if you invest in real estate stocks, 20 percent of the dividends will now be tax free,” Janus said.
Janus notes that the AICPA sent a letter to the Treasury Department inquiring whether that 20 percent rule applies to real estate stock within a mutual fund in the same manner as it would if someone has “outright ownership.”
The letter essentially stated, “‘Please tell us now, because people are in that situation,’” Janus said. “And we don’t know the answer to that. But most people believe that because of the language of the law, taken literally, if you own the stock in a mutual fund versus an outright ownership, you don’t get the 20 percent.”
$750,000 Mortgages Versus $100,000 Mortgages
One of the pieces of the new tax reform that made headlines has to do with interest deductions on high-priced homes. Previously, mortgage interest could be listed as an itemized deduction on homes priced up to $1,000,000. Going forward, that amount has been lowered to $750,000.
“If you have a mortgage from last year, the interest on that mortgage is still deductible, and that was capped at $1,000,000,” Janus said. “If you refinance that mortgage this year and take another $1,000,000 in a new mortgage, that’s still deductible if it replaces the $1,000,000 mortgage from last year, so you still get the full deduction for the interest on that loan. If you take out a new loan, the amount that you can borrow that’s tax deductible is $750,000.”
$100,000 in Home Equity Loans
Home equity loans are a popular tool for making home improvements and other large-scale purchases possible. This financial mechanism is another area that will see changes.
“A lot of people had home equity loans last year, and the law permitted you to deduct the interest on up to $100,000 of home equity loan,” Janus said. But the legislation made some changes to this.
Those who have a home equity loan or line of credit or refinance can deduct up to $100,000 still, as before; the change involves how those tools are used.
“Now, that needs to be clarified a little bit,” Janus said. “If you took out the home equity loan to buy a boat, to go on vacation, to pay for your kid’s college tuition, then that interest is no longer deductible. [However,] if you took out that home equity loan of $100,000, and the total debt was less than $1,000,000 and that home equity loan was used to improve your home, then the interest on that is deductible … and the total was less than $750,000, the interest would be deductible if you use that money to improve your home. A lot of people got that confused.”
Janus advises people to educate themselves on the parts of the act that may impact them most. And, he notes, they should keep in mind that unless the act is renewed or made permanent, it will expire in 2026.
“You certainly ought to know the things that affect you,” Janus said. “Or, going forward, whether it’s investing money—or whether you work for a company and you have an option to defer your income or contribute it to a 401k plan— you need to have an idea of what’s going on, because the law that got changed for individuals expires in eight years, and [then] we go back to what it was last year. So if you’re making long-term decisions, they change. So for example, if you have $1,000,000 mortgage eight years from now, it’s deductible.”
Tax season is a good time to hire someone to answer your questions and make sure you’re on the right track, Janus notes.
“I think having somebody do at least a checkup looking at things and talking about what you’re doing and getting a feel for am I doing the right things, am I taking advantage of what I can under this law?” Janus said.
Associated Bank – Corp and its affiliates do not provide tax, legal, or accounting advice. Please consult with your tax, legal, or accounting advisors regarding your individual situation.