Home Equity Loan Interest

New Law Eliminates Deduction For many of you, finding the money to pay for a new car, boat or dream vacation was as easy as tapping the equity in your home. Prior to 2018, you could use the equity in your home to make large purchases, pay expenses or consolidate debt and deduct the interest on up to $100,000 of debt.

After 2017 and before 2026, this tax savings strategy is gone. While you can still use the equity in your home to borrow needed funds, the interest is no longer deductible unless you use the money to buy, construct or improve your home. The elimination of this deduction applies regardless of when the home equity debt was incurred.

2018 Year-End Considerations

Looking for last minute tax savings? Here’s some ideas to consider by December 31st, 2018:

· Boost pretax contributions to your 401(k) or similar retirement plan to reduce your income

· Ask if a year-end bonus can be paid out next year instead of this year

· If you are an independent contractor, reduce your income by making year-end purchases of tax-deductible expenses such as equipment and supplies

· Also, hold off on collecting on unpaid invoices until next year

· Sell off investment positions with unrealized losses to reduce capital gains

· Hold off selling profitable positions until next year

· Bunch your charitable deductions, meaning, if you are still itemizing, consider making your contributions this year rather than next year. It might make more sense to itemize this year rather than next year because these standard deductions are indexed for inflation and can be expected to increase slightly.

· Pay your January mortgage payment in December

· Make an estimated payment to avoid penalty. The rule is that you pay 100-110% of your tax liability for the current year, based on the previous year liability. If you find you are coming up short, you can make a fourth quarter tax payment on January 15th to help offset any penalties.

· Going into 2019, you will need to change your withholding by filling out a new W4 and submitting it to your payroll department. We can discuss this more at tax time.

As a refresher, here are some of the changes to itemized deductions for 2018 and going forward under the Tax Cuts and Jobs Act of 2017:

2018 itemized deductions There are numerous changes to itemized deductions to be aware of under the new law. Note that states vary widely in how they treat itemized deductions for individual taxpayers under state income tax laws.

Pease Limitation With the passing of the Tax Cuts and Jobs Act, the limitation on itemized deductions is temporarily repealed for tax years beginning on January 1, 2018. The repeal does not apply to taxable years beginning after December 31, 2025.

Mortgage interest For any acquisition indebtedness incurred after December 14, 2017, interest would only be deductible for loan amounts not exceeding $750,000 (for married filing jointly). As under current law, the acquisition debt limit applies in aggregate on up to two personal residences. Existing mortgages as of December 14, 2017 continue to be subject to the current $1,000,000 limitation.

Home equity loans Interest will no longer be deductible on a home equity loan after 2017 unless the proceeds are used to substantially improve a home, and therefore meet the definition of acquisition debt.

State and local income, sales, and property taxes The law permits individual taxpayers to deduct up to $10,000 for any combination of state and local income taxes, property taxes and sales taxes. Taxes in excess of $10,000 are not allowed as a deduction on schedule A.

Miscellaneous itemized deductions Deductions for miscellaneous itemized deductions subject to the two percent floor (including tax preparation fees, investment expenses and unreimbursed business expenses) are repealed.

Donating Noncash Items To Charity

How to reap the full tax benefit. You’ve done your spring cleaning and now you have boxes of outgrown clothing and unused household items. Should you toss them, have a garage sale or keep them?

If you opt for a garage sale, you have to devote time to making everything presentable, marking prices, setting up tables, advertising and running the actual event. The benefit is instant money for all your hard work, but generally at far less than what it’s really worth.

A better option might be to donate that property to a qualified charity such as Goodwill, the Salvation Army or your local church. If you are able to itemize your deductions, you can deduct the fair market value (FMV) of the property you donate. Here are the three most common mistakes that people make when donating property:

•    Failure to document what was actually donated to the charity. Say you donated six men’s shirts, two pairs of children’s shorts, three blouses and five pairs of men’s pants. Chances are you just put everything in a bag and told your preparer that you donated a bag full of clothing and you have no documentation. Keep a detailed list of the items you donate and their condition.

•    Undervaluing the property that was given to the charity. This is always a subjective area but the law states the deduction is equal to the FMV of the property given. What do you use as the FMV? If you give used clothing to Goodwill, for example, the FMV would be the price that typical buyers actually pay Goodwill for clothing of this age, condition, style and use. Along with a detailed list of the items you donate, establish a value for each item. Local thrift stores often have a list of items with suggested values.

•    Failure to obtain documentation that the charitable organization received the property. Charitable organizations will provide you with a receipt acknowledging your contribution.

If you can establish these three areas, you are in complete compliance with the law and are allowed to deduct the value of all property you donate to a charity.

Post-2018 Alimony Agreements

Irrelevant for tax purposes. There is no change in the federal income tax treatment of alimony and separate maintenance payments that are required by divorce agreements executed before 2019. As such, alimony payers take a deduction while alimony recipients include the payment in income post-2018. 

However, for any divorce or separation agreements executed in 2019 and later years, alimony will no longer be reported on the tax return. This is also the case for prior agreements later modified to state that the new rules apply.

The Party Is Over...

Deduction for entertainment expenses no longer allowed. Starting in 2018, deductions for activities that are generally considered to be entertainment, amusement or recreation expenses, or with respect to a facility used in connection with such activities, are disallowed. Forget front row concert tickets or box seats at the MLB game on another company’s dime.

Before the new law, if you took a potential client golfing to discuss a future relationship, this cost was 50% deductible as entertainment associated with the active conduct of a trade or business, but only if adequate records were kept. Now there is no such deduction. The government likes this provision because it eliminates the subjective determination of whether such expenses are sufficiently business-related.

However, if you reward an employee with an expense-paid vacation, you can still deduct this type of entertainment since it is treated as compensation to the employee. If you gave the same type of reward to a contractor, you would have to issue a 1099-Misc in order to gain a deduction.

Celebrations like holiday parties and annual picnics are still fully deductible because they are for the primary benefit of employees. Yet membership dues for any club organized for business, pleasure, recreation or other social purpose are not deductible and never have been allowed.