Explaining TCJA changes

Alerting Clients to TCJA Changes: Part Three

Jan 17th 2019
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In two previous columns, I discussed changes introduced by President Trump’s signature legislative accomplishment, the Tax Cuts and Jobs Act (TCJA), including payments for medical care and fees for return preparation.

What follows are the highlights of some other changes:

Interest payments on mortgages for residences: The old rules for 2017 and previous years allowed homeowners to claim itemized deductions for interest on as much as $1 million of mortgage debt for a main home and a second one used as a vacation retreat.

The revised rules for 2018 and later years decrease the allowable deduction for new buyers from $1 million to $750,000 for married couples filing jointly and qualifying widows/widowers (surviving spouses who qualify for the same breaks as married couples for two years after a spouse dies) and single persons and $375,000 for married persons filing separate returns. The caps aren’t “indexed,” meaning they’re not adjusted annually to reflect inflation.

As with the old rules, new buyers get only one bite at the apple. The TCJA requires them to apply the new ceilings to the combined total of loans used to buy, build or substantially improve a person’s main and second homes. It also abolishes any deduction for interest on home-equity borrowing for other purposes—for instance, buying a car.

Payments of state and local income taxes and property taxes: The new rules place ceilings on deductions. According to the legislation, write-offs can’t exceed $10,000 for couples filing jointly and qualifying widows/widowers (see above) and single persons. The ceiling drops to $5,000 for married couples filing separately.

Several clients asked whether there was a tax strategy that would make it possible for a couple filing separately to qualify for two $10,000 deductions. They frowned when I told them that there was only way for that to happen. The couple would have to end their marriage. 

Not as an aside, who are the individuals hardest hit by the ceilings? Those who reside in Democratic-leaning states like California, Connecticut, New Jersey and New York and who have resigned themselves to annual payments of state and local income taxes and property taxes that aggregate well above $10,000. 

Here, too, the ceilings aren’t indexed. They apply for the years 2018 through 2025. After that, they’re scheduled to go off the books.

What’s supposed to happen then? Well, the rules for 2017 and earlier years that didn’t impose ceilings go back on the books.

I caution my clients that it would be injurious for their health if they hold their breath until the pre-2018 rules actually make a comeback. There will be two intervening presidential elections and a mid-term one; lots could happen.

Net operating losses: Previously, the law authorized carrybacks and carryforwards for net operating losses. The TCJA ended the former. For 2018 and subsequent years, it allows only the latter.

Next week, in my fourth and final piece, I'll discuss a few other changes you and your clients should be aware of.

Additional articles: A reminder for accountants who would welcome advice on how to alert clients to tactics that trim taxes for this year and even give a head start for next year: Delve into the archive of my articles (more than 275 and counting). 

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