While the GOP Tax Act adds much unnecessary complexity to the Tax Code, it does make some things simpler.
By eliminating the miscellaneous deductions subject to the 2% of AGI limitation, taxpayer recordkeeping is simplified. Employees who are not reimbursed for their job-related expenses under an accountable plan will no longer need to keep track of business mileage, business meals and entertaining, and other employee business expenses. And there is no longer the need to keep track of job-seeking expenses, including travel to interviews, or educational expenses to maintain or improve skills required in your current trade or business. Investment and tax preparation costs are no longer deductible, so no longer a need to keep track of these expenses. Of course, this simplification comes at a cost – the loss of a potentially large tax deduction.
The Act changes tax planning considerations, and makes year-end planning simpler.
To begin, with the increased Standard Deduction, unfortunately made much less attractive for taxpayers without dependents due to the loss of the personal exemption deduction, there will be less taxpayers who will benefit from itemizing.
For those who could be able to benefit from itemizing –
* It will still be possible to “bunch” medical expenses and charitable contributions – that is claim additional deductions in a year when you may be able to itemize, so that you itemize every other year. The use of a charitable donor-advised fund account and contributions of appreciated stock at year-end will still apply. And during the year, the Qualified Charitable Distribution (click here) is an even more attractive strategy for those age 70½ and over.
* With the limitation of the itemized deduction for combined property and state and local income or sales taxes to $10,000, there is little that can be done here, other than to attempt to maximize the deduction. If the $10,000 maximum will not be already met, it is still a good idea to make any 4th quarter state estimated tax payment in December instead of January of the next year. And pre-payment, if possible, of property taxes can be used to bunch deductions.
* One can still make a 13th mortgage payment to bunch the interest deduction.
* The total elimination of job related, investment, and tax preparation expenses, and other miscellaneous deductions subject to the 2% of AGI exclusion, makes these deductions no longer an issue, so there is nothing more than can be done.
* And the changes to the dreaded Alternative Minimum Tax (AMT) will create less victims, so AMT considerations will no longer apply for most.
While the new limitations on the mortgage interest deduction simplifies the Tax Code, it greatly complicates recordkeeping for taxpayers and potentially for tax professionals. Under the GOP Tax Act interest on home equity debt, regardless of the amount of the debt principal, is no longer deductible. Period. There is grandfathering of existing acquisition debt interest rules – but there is NO grandfathering of existing home equity debt. Taxpayers will need to separately track acquisition and home equity debt going forward, and going back to day one on all current mortgage debt!
I do believe in the original House version of the bill all existing mortgage debt was “grandfathered” – including home equity debt. While I can understand, and agree with, the philosophy of limiting deductible mortgage interest to acquisition debt, for practicality sake I wish that existing home equity debt had been included in the grandfathering.
Taxpayers have always been required to keep separate track of acquisition and home equity debt, but few actually did due to the allowance of a deduction for interest on up to $100,000 of home equity debt. This is now something that MUST be done, especially for taxpayers with existing mortgages.
Even if a homeowner never incurred any separate home equity debt – never took out a separate home equity loan or opened a home equity line of credit – if an original acquisition mortgage was ever refinanced they may have home equity debt. The additional closing costs of each refinance that were added to the principal of the refinanced mortgage loan is home equity debt. The only way you would avoid home equity debt in such a situation is if you literally refinanced only the principal from each old mortgage and paid all closing costs in cash.
For example - you purchased a home in 2011. You have had only one mortgage, from the original purchase, and no home equity debt. You refinanced the original mortgage in 2015 to get a better rate. The principal balance on the original mortgage was $197,374. The principal balance of the refinanced mortgage was $200,000. You did not take any money “out”, and paid a little over $1,000 at the closing. The difference is the closing costs for title insurance, inspections, fees, etc. etc. You have have acquisition debt of $197,374 and home equity debt of $2,626.
I will be rewriting my Mortgage Interest Guide, which includes worksheets for keeping track of mortgage debt and a detailed example of how to use them, to reflect the new rules for 2018 and beyond. It is only $2.00, delivered as a pdf email attachment. I will let you know here when it is available.
So, as you can see, not only has the Tax Code been drastically changed by the new GOP Tax Act, but also the year-round recordkeeping requirements of taxpayers.