Now is the ideal time to schedule a tax planning session. Your 2017 tax return outcome is still fresh, and it's early enough in the year to take advantage of the numerous tax law changes taking place in 2018. Here's a brief overview of some of the new tax issues that you need to plan for now.
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| Bunching Because of the changes to the deductions structure, using itemized deductions may now require bunching two or even three years of expenses into one tax year. Things like donations to charity and medical expenses that you may have spread across several years are now better bunched into a single year to maximize your tax savings. If you typically take care of medical expenses or charitable donations at a regular time every year, hold off this year until you have a new tax-efficient plan. |
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| SALT (State and local taxes) There's now a $10,000 combined total cap on deductions of state and local income, sales and property taxes, which is going to impact a lot of people, especially in high-tax states. This may be a big factor to account for if you've relied on this deduction in the past. Get an analysis done to see how much larger your tax bill is going to be because of the cap on SALT taxes. There may not be much you can do about it, other than changing where you live and own property, but you'll need to have a clear picture of how it will impact your tax return in 2018. |
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| Mortgage interest changes There are several new rules changing how mortgage interest is deducted. You can no longer deduct the interest on mortgage indebtedness greater than $750,000. And you can no longer deduct interest on mortgage indebtedness that wasn't spent directly on buying, building or substantially improving your home. If you have previously claimed a home equity loan interest deduction, you'll need to review how this will affect your itemized deductions. |
These are just a few examples of things that you'll need to review in the wake of the largest tax law change in more than 30 years. Take some time this summer to make sure you have a plan in place.
Six Home Ownership Tax Benefits
If you own or are considering purchasing a home, you can take advantage of many tax benefits. Here are six of the most commonly used homeowner tax breaks:
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| Property tax deductions. You can deduct up to $10,000 in combined state and local taxes. Called the SALT deduction, this can be used to deduct local property taxes, state income taxes, and state and local sales taxes. | |||||
| Closing cost deductions. You can deduct some of the closing costs of a home purchase in the year you buy it. This includes things like real estate taxes and mortgage discount points you pay up front to lower your interest rate over the life of your loan. Because each point costs 1 percent of your total mortgage amount, the tax deduction on these costs can be substantial. | |||||
| Home improvement tax breaks. If you take out a second mortgage or what is commonly called a home equity mortgage and use it to buy, build or substantially improve your home, you can deduct the interest on that loan from your taxes. This feature is now grouped into your total mortgage indebtedness, which is capped at $750,000.
Caution: Interest on home equity loans used for any other means (e.g., to pay down credit card debt or to purchase a car) is no longer deductible. |
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Energy-efficiency tax breaks. There are special tax breaks available for renewable energy and energy-efficiency upgrades to your house:
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| Capital gains exclusion. You have the ability to exclude up to $250,000 of profits (or $500,000 if you are married) from the sale of your home, as long as it's your primary residence and you've lived there at least two years.
Remember, if you're thinking of buying a home, you'll want to make a tax review part of your preparation. Because the tax deductions on mortgage interest and points can be so substantial in the early years of home ownership, they may factor in to how much home you can afford. |
