As the final details of the Tax Cuts and Jobs Act emerge from Washington D.C., we would like to share some of the key changes that will affect our customers in the coming year. Changes regarding deductibility of mortgages, Home Equity Lines of Credit (HELOCs), as well as state and local taxes are found in the new law. Highlights for individuals include:
- The deductibility of interest on new mortgages is limited to $750,000 of principal. Existing loans made prior to 12/16/2017 will be grandfathered at the old level of $1,000,000. The refinancing of grandfathered mortgages will also be allowed under the new law.
- Interest paid on a Home Equity Line of Credit (HELOC) will no longer be deductible. The pre-reform level was $100,000.
- The deductibility of state and local taxes, including income and property taxes, will be capped at $10,000 per year for Single and Married Filing Jointly taxpayers. Married Filing Separate taxpayers will be capped at $5,000.
Beyond the changes in deductibility of many items, the new law completely restructures the old income brackets and tax rates. Generally speaking, the result is that most individuals will see their income taxed at a lower average and marginal rate. The standard deduction will almost double for all filers. In exchange for this increase, personal and dependent exemptions that were scheduled to be $4,150 per person for 2018 have been repealed. Alternative Minimum Tax (AMT) exemptions have also increased substantially.
Another notable change is the increase in the child tax credit from $1,100 to $2,000 ($1,400 is refundable). The phase-out for eligibility of this credit has been significantly increased from $75,000 (single) and $110,000 (married) to $200,000 (single) and $400,000 (married).
Estate/Gift/Generation-Skipping Transfer tax exemptions have been doubled for individuals, now $11.2M per U.S. domiciliary. This means a married couple would be able to transfer a combined $22.4M to beneficiaries before any estate tax would be assessed.
What does this mean for Connecticut residents, as well as other high-tax states?
The impact of the tax law change will affect all taxpayers differently. For filers that previously had itemized deductions well above the standard deduction due to high property taxes, state income taxes and mortgage interest, there is a good chance that their tax bill will increase a bit. This is due to more income being subject to taxation. The overall tax rate may be lower but it may not be low enough to offset the lost deductions. This may also affect households with many dependents, due to the loss of the personal and dependent exemptions, again causing more income to be subject to taxation. However, for many filers that had utilized the standard deduction, they will likely see a decrease in their overall tax bill. It is important that all taxpayers consult with their tax advisor in the New Year to adjust withholdings on income in 2018.
*This article is intended to be used for education purposes only. Please consult your Tax Professional to see how you will be affected.