5 TAX BREAKS THAT HAVE DISAPPEARED (SORT OF)
The major overhaul of the U.S. tax code has left many homeowners confused this tax season. But the new Tax Cuts and Jobs Act (TCJA) IS not as frightening as you might think with regard to 2018 ta deductions.
You might feel better with the knowledge that most of the old tax breaks haven’t disappeared completely. Instead, they have just morphed: redefining who qualifies for what. Here is a rundown of 5 major tax breaks that have changed this filing year, and important info on the loopholes to get around them. Of course, before following any of the information explained below, make sure you discuss them with your tax adviser.
1. Deductions for Your Home Office
“For non-self-employed people, the home office deduction is going away entirely,” says Eric Bronnenkant, certified public accountant, certified financial planner, and Betterment’s head of tax.
The bad news is that the home office deduction is gone for W-2 employees who only use their home office occasionally. In years past, if you worked at home once in a while for a company and received a W-2, you could claim the home office tax deduction. But not anymore.
The loophole: Individuals who work from home and are self-employed full time are still eligible to take this deduction. There is still hope for those W-2 telecommuters who occasionally set up shop at home. That is correct. You can continue taking this deduction by changing your status. All you have to do is ask your employer to allow you to change your work status from an employee to an independent contractor.
2. A Cap on Property Tax
“Before, regardless of the amount, all property taxes were tax-deductible,” explains Bronnenkant. He goes on to explain that this tax season, “the maximum you can deduct is $10,000, and that includes state and local income tax, property tax, and sales tax.”
The new tax bill puts a cap on the amount of property tax homeowners can deduct. This affects homeowners who pay more than $10,000 a year in overall state and local income taxes because they are no longer eligible to take that deduction.
The loophole: The changes on the $10,000 overall tax limit applied on Schedule A as an itemized deduction have no bearing on the 2018 tax deductions you use for a rental property on Schedule E. That means good news for landlords because their deduction could edge past that $10,000 limit.
3. Expenses Incurred While Moving for a Job
“Because moving expenses are not deductible, employer reimbursements for moving expenses are taxable to the employee,” explains Michael Sonnenblick, tax analyst with Thomson Reuters Checkpoint.
Before 2018 those who moved for a new job could earn an above-the-line moving expense deduction to reduce their federal taxable income by the cost of the move. Those taking the deduction had to meet certain criteria to qualify, but did not have to itemize the move to claim it on their tax return.
The loophole: California allows homeowners to deduct work-related moving expenses subject to distance and time requirements. Plus, Federal law limits moving expense deductions to members of the Armed Forces on active duty. There are also other steps you can take to defray the cost of your move and your tax bill. Make sure to discuss these 2018 tax deductions possibilities with your tax consultant.
4. Interest Incurred from Mortgage Debt
CNBC reports, “Prior to the Tax Cuts and Jobs Act, you were able to write off the interest for up to $1 million in mortgage debt. If you took out a home equity loan or line of credit, you were also able to deduct the interest paid on loans of up to $100,000.”
Now, taxpayers with up to $1 million in mortgagedebt can deduct the interest paid on their first and second mortgages. The limit is $500,000 if married and filing separately. That means any interest paid on first or second mortgages over this amount is not tax-deductible. Make sure your accountant does not take annual effective interest rate after taxes into account.
The loophole: According to the Internal Revenue Service, taxpayers can continue to deduct the interest they pay on home equity loans “in many cases,” despite the new tax law’s limitations on the mortgage interest deduction. Ask your tax preparer if you are in this group.
5. Home Equity Loan
According to Michael Ruger, managing partner of Greenbush Financial Group, “to help pay for the new tax cuts, Congress had to find ways to bridge the funding gap. In other words, in order for some new tax toys to be given, other tax toys needed to be taken away.”
That means, in the past, taxpayers who want to take a home equity loan or tap into a home equity line of credit could deduct the interest of that loan and spend the money on whatever they wanted. Traditionally, the interest on these loans could be deducted up to $100,000 for married joint filers and $50,000 for individuals. But now, home equity loan interest is deductible only if it is used to “buy, build, or improve” your home.
The loophole: Reclaim this deduction by refinancing your second mortgage and your first into a new mortgage that includes both amounts. This essentially turns the equity loan into a regular mortgage, which means that you can deduct that interest.
As I have emphasized above, remember to consult with your accountant before following any advice when it comes to 2018 tax deductions — especially this year. And remember to consult me when you are considering buying or selling in any of the Santa Barbara area’s upscale communities, I’m available by phone at 805.886.9378 or email me at Cristal@montecito-estate.com.