The other day I gave a talk at the Observer & Eccentric Spring Expo. My topic was the new tax law. There were a lot of great questions and concerns so I thought I’d run through some of the provisions of the new tax law that affect you as individuals. In that regard, it’s important to know that the provisions in the new tax law that affect individuals will expire in 2025. Because of archaic rules in the Senate, the tax cuts at this point in time cannot be made permanent. Of course, it’s impossible to know if the laws will eventually become permanent or not.

One of the major changes in the law deals with alimony. Divorce settlements or amendments to existing divorce settlements that occur after January 1, 2019, will be subject to the new tax law. Basically, the new tax law will no longer allow the person paying the alimony to deduct it and at the same time, the person receiving the alimony will no longer have to report the alimony as taxable income. If you already have a divorce settlement currently in place, the new tax law will not impact you.

The new tax law also changes deductibility of interest on home equity loans. The previous law allowed home equity loan interest to be deducted as long as the underlying debt was $100,000 or less. It didn’t matter what you used the money for and the interest was deductible. The new law changes this. Under the new tax law, interest on home equity loans will only be deductible if the money is used to buy, build or substantially improve your home. In other words, if you use money from your home equity loan to buy a new home, that interest will be deducted. On the other hand, if you use a home equity loan to pay off high interest rate charge cards, that interest would not be deductible. One other change that affects mortgages is that under the current law you can deduct interest on a loan up to $1 million. Under the new law that amount has been reduced to $750,000.

Probably the change in the new tax law that has gotten the most publicity is what happens to state and local taxes. Under the previous law, state and local taxes such as State of Michigan income tax or property tax, was deductible if you itemized deductions on your return. That is no longer the case today. Today, under the new law, state and local taxes, property taxes and sales taxes are only deductible up to $10,000. However, the offset is the fact that the standard deduction has been nearly doubled; $12,000 for individuals, $24,000 for couples.

I reminded the people at the Expo that it’s important to recognize that they should never do anything for tax reasons and tax reasons alone, but rather should focus on the bigger picture, and that is whether or not it makes sense financially. Ultimately, when you make a financial decision, taxes are a factor but they are not the only thing you need to consider. I believe in keeping things simple and that is why I always believe what you should ultimately focus on is cost, fees and taxes, and what ultimately ends up in your pocket. As far as I’m concerned, that’s the bottom line and it’s where your focus should be.

Good luck!

If you would like Rick to respond to your questions, please email Rick at rick@bloomassetmanagement.com.