by
Badgley Phelps
| Dec 22, 2017
By Financial Planning Team
With an over 500-page proposal, the just-passed tax bill will be one of the largest tax cuts in history – and tax accountants will be busy for years familiarizing themselves with its finer points. Broadly speaking, while corporations will garner a substantial portion of the benefits and are permanent, most individuals will also benefit – but these benefits are slated to sunset in 2025. Across-the-board lowering of tax rates should benefit most taxpayers. Given the breadth of the new tax bill, we have highlighted a few areas that may be of interest to our clients.
SALT (State and Local Taxes)
This deduction has to do with state and local income taxes, and according to the Tax Foundation, nearly 90 percent of the SALT benefits go to taxpayers with an income higher than $100,000. Beginning in 2018, households will be given the option to deduct their combined state and local property and income taxes, but only up to a cap of $10,000. That limit is on the combined total of property and income taxes, not $10,000 each. As CNN Money explains, “Currently the deduction is unlimited. But filers have to choose to deduct either individual income taxes or sales taxes. For most people, deducting income taxes is more beneficial (unless of course you live in a no income tax state). In addition, property taxes were also entirely deductible.” The SALT deduction enables taxpayers who itemize to push beyond the standard deduction and qualify for other deductions, too.
529 plan
A 529, or Qualified Tuition Program, is a tax-advantaged way to save for a child’s education expenses. Contributions made to a 529 plan are not tax-deductible for Washington State residents. However, funds in a 529 plan grow tax-deferred, and withdrawals are tax-free as long as the withdrawals are used for the student’s qualified education expenses. With the new tax bill, distributions from a 529 can now be used tax-free for private elementary and secondary school expense of up to $10,000 per student each year, and includes public, private and religious schools. For those young families that are considering private elementary or secondary school for their children, the expansion of the 529 plan may increase the value and flexibility of this education funding strategy.
Charitable deduction
This deduction still exists; however, since the new tax plan doubles the standard deduction, fewer taxpayers will itemize their deductions beginning in 2018. According to the Tax Policy Center, more than 46 million filers would be expected to itemize under current law, but that number could drop to under 20 million in 2018 under the new law.
In order to address this, taxpayers can contribute to a donor advised fund or cluster itemized deductions. As National Philanthropic Trust says, “An easy way to think about a donor-advised fund is like a charitable savings account: a donor contributes to the fund as frequently as they like and then recommends grants to their favorite charity when they are ready.” Donors receive an immediate tax benefit to the maximum the IRS allows. With regard to clustering itemized deductions, individuals may seek to make charitable contributions in years they are taking an itemized deduction as opposed to the standard deduction.
Mortgage interest deduction
Mortgage interest is deductible, but not all mortgage interest is the same – and that distinction matters when it comes to the new tax bill. Borrowing to acquire a home or for home improvement qualify for the interest deduction. Yet, borrowing for other purposes, such as financing a vacation or paying down credit card bills, would not qualify for the mortgage interest deduction.
Beginning in 2018, the amount of mortgage interest taxpayers can deduct for newly purchased first or second homes has been reduced from $1 million of debt principal, including up to $100,000 home equity line of credit (HELOC), to $750,000 of mortgage. Interest expense on current mortgages of up to $1 million still qualify for interest deductibility.
In addition to thinking about taxes and how they’ll change in 2018, the end of the year is a good time to assess your overall financial situation.
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Badgley Phelps is a not a tax, insurance or legal adviser. You should consult with other professional advisers for direction on specific tax, insurance or legal strategies.
