We are back from our Winter vacation in the Caribbean and that means it’s time for us to preparing for tax time. We promised our accountant that we would connect with her as soon as we got back from our trip as there are so many changes to the tax code that she wanted to get paperwork from us as soon as we could.
The changes to the federal tax code were pretty substantial. The standard deduction for 2018 income went from $13K from couples up to $24K. For individuals it went from $6.3K to $12K. This means that many people that used to itemize deductions now can just take the standard deduction and save a lot of paperwork.
Given our situation, we will likely be still be itemizing our deductions and seeing where we fall relative to the AMT (Alternative Minimum Tax). It will be important for us to talk to our accountant about some of the changes in what is deductible to see what is the best course for us. I’d recommend to you to do the same.
Here are some of the key changes to deductions that I researched from the Republican tax reform passed last year:
- SALT over $10K – State and Local tax (SALT) payments over $10K are no longer deductible. They used to be unlimited, but it wasn’t really fair to people who lived in states that didn’t have income tax, but were taxed in other ways that weren’t deductible (like the sales tax). We live in a high tax state, so this won’t help us too much, but I’m fine with the change since it makes it more fair/flat across states.
- Advisor Fees & Investment Fees – These were termed ‘miscellaneous itemized deductions’ and had to exceed 2% of your adjusted gross income. I’m not sure we ever had deductions high enough to reach that limit, but I will check when we sit down with our accountant.
- Tax Preparation Cost – Our taxes are pretty expensive to prepare each year as we have our personal taxes, LLC taxes, and our son’s taxes. We also have income in a few different states, so sometimes we are mailing out 5 or 6 different tax forms in April. Perhaps by eliminating this deduction, people will put more pressure on government to further simplify tax preparation. In Japan, only 1-2% of households even file taxes – it’s standardized for everyone else.
- Moving Expenses – We’ve never had moving expenses to worry about, so I don’t know too much about this one. My thought would be that if you are moving, either you or your employer is making a decision. Everyone else who is staying put shouldn’t have to subside that choice.
- Casualty Loss Deductions – Only those declared in Federal Disaster Zones can now deduct damage from natural disasters. We’ve had storm damage in the past, but nothing high enough to permit a deduction.
- Alimony Deduction – Under the new tax code, alimony is no longer considered income. Apparently, people used to form alimony agreements that allowed for some deductibility. We’ve never been divorced, but if you have, you probably just got stuck with a bigger tax bill.
- Season Ticket Donations – Some colleges & universities used to give alumni donors free sports tickets for donations made to the school. Now they need to deduct out the ‘fair market value’ of those posh seats.
- Mortgage Interest over $750K – If you have a mortgage higher than $750K, you can no longer deduct mortgage interest (up to $1M). Again, I’m not sure why this was a deduction in the past – no one really needs to buy a fancy house with that much debt.
- Unlimited Home Equity Loan Interest – This change put a lot of limitations on what you can deduct from a home equity loan. If you have one, you might want to investigate what has changed. We’ve never had one and perhaps this will encourage others to pay off this debt!
Based on the analysis that I’ve done, I am expecting that our tax rate has gone down quite a bit. We probably won’t know exactly how much until all of the paperwork is finished in a few weeks.
How did you make out under the tax changes?
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