Following a “Lunch and Learn” session on Facebook where viewers asked Ralph Albert Thomas, the executive director of the New Jersey Society of CPAs, specific questions about the new tax code, he sat down with Business Correspondent Rhonda Schaffler to answer some more questions.
Schaffler: Ralph, thanks for your time.
Thomas: Thank you, Rhonda.
Schaffler: We heard mention of alternative minimum tax. Can you could clarify for us what that is and how that in particular will change next year?
Thomas: Well, how long do we have? I’ll give some of the basics because there’s a lot of things that go into it. Previously, the threshold for singles was $54,300 to $120,700, and for married, $84,500 to $160,900. Those thresholds will now be increased — for singles, it’ll be $70,300 to $500,000, and for married, $109,400 to $1 million. So what this essentially does is make fewer people subject to the alternative minimum tax. The alternative minimum tax has been an issue over years because when it was originally established, it was set to address the higher income brackets and all of a sudden middle-class people slipped into it. It has been something that every year people have been saying, ‘What are we going to do to change the alternative minimum tax?’ so this does help in increasing these thresholds.
Schaffler: Ralph, tell me about the mortgage interest deduction. How much are you allowed to take now, and how does that change going forward? Does it include second homes?
Thomas: Yes, what ended up in the bill as a result of the conference is that you can deduct mortgage interest up to $750,000, both for primary residence and also for a secondary or vacation home. That’s the new threshold going forward.
Schaffler: What about home equity lines of credit?
Thomas: Home equity lines of credit are eliminated entirely, so those individuals that have a HELOC [home equity line of credit] probably might start to think about refinancing and combining the first mortgage with the HELOC. One of the things that they’re going to have to be mindful of is the change in interest rate, particularly if they have a first mortgage that they secured back in the late 2007, 2009 period when mortgage interest rates were down. So, they’ll have to really sit down and run the numbers.
Schaffler: Another deduction that people take quite a bit is for student loan interest. Now, that looks like you’ll still be able to do that going forward?
Thomas: That is correct, and also on the student front, there was discussion previously about when there’s a waiver of tuition, like for graduate students and folks in medical school, that they would have to pick that up as income. That is not happening, so those are a couple of good things with regard to educational costs.
Schaffler: Also a positive, medical expenses can still be deducted up to a certain limit.
Thomas: That is correct. Currently, it’s 10 percent of your adjusted gross income. Any medical expenses that exceed that, you would have been able to take. But now, with the new law, for 2017, it’s going to be 7.5 percent of your adjusted gross income, and also for 2018, and then it reverts back to the 10 percent, to a higher level.
Schaffler: It’s very complicated. There are a lot of moving parts here, so I’m trying to get as much out of you as I can in this brief period of time. Something a bit under the radar, but does affect quite a few people is alimony payments.
Thomas: Again, that is going to have an impact beginning Jan. 1, 2019, so if you’re currently thinking about getting divorced you may want to wait, and it depends on what side of the coin you’re on. Currently, if you are paying alimony, you get to deduct that and then the recipient of the alimony payment has to reflect that as income. So on Jan. 1, 2019, that will change for any divorces that are post-Dec. 31, 2018.
Schaffler: We’ve been talking about people who take itemized deductions. For those who take the standard deduction, you will take quite a bit more off your taxes.
Thomas: That’s right. The standard deduction has gone up dramatically under the new bill, so those individuals that fit into that will get a higher deduction, if you will, by the standard deduction.
Schaffler: And you should get more in your paycheck as well next year?
Thomas: The hope is, now people may have to re-calibrate their W4s, which tell the number of exemptions. Previously, if you were taking two exemptions you may have to do three or four exemptions because of the higher standard deduction that you’ll be able to take so that you would then see the results. Otherwise, you would get it on the back end when you file your tax returns.
Schaffler: So very involved in what’s happening. There’s a possibility that there could be some technical review of elements of this.
Thomas: Sure. We’ve heard that because this thing went so quickly, when you think back to the last major tax reform, it took awhile for it to meander on and become law. This has gone through so quickly, so there are obviously going to be some things that they go back and take a look at, that they feel that they missed, until they’re what they call technical corrections, so that’s a process in and of itself. They have to reconvene, there has to be a vote on it, and I think the vote has to be a super-majority so not just that you have to get to 50 and the vice president turns the tide with his vote. So, that’s going to be interesting to see what technical corrections come up and what impact that’s going to have on the overall tax reform bill.
Schaffler: Well, you and many other accountants will be very busy over the next couple of months sorting this out.
Thomas: And not only that, but busy now because a lot of our members are getting calls from their clients asking, ‘what should I do?’ The prepaying of property taxes has been a big, big item and we’ve heard that numerous people have been going to their municipalities trying to prepay their taxes. The next couple of days are going to be interesting, I think, too.