The Tax Cuts and Jobs Act affected the 2018 tax year. Now that 2019 is coming to a close, LGA Managing Partner John Geraci speaks with Partner Steven Gallant regarding the elements that had the most impact on individual taxpayers. In particular, the changes they observed in deductions, including mortgage deductions, retirement contributions and estate tax deductions.
[John]: Hi, I’m John Geraci and I’m here with Steve Gallant. today from LGAs tax department and we’re here to do a postmortem on the Tax Cuts and Jobs Act that affected the 2018 tax year, which was just sort of closed out the filing season at the end of October, 2019. I thought we’d spend a little bit of time breaking down the significant elements that affected a lot of individual taxpayers. And I think the starting point for this discussion would be trying to understand what happened with respect to itemized deductions versus standard deductions. Cause it seems like a lot of our taxpayers who had previously itemized were now taking the standard deduction.
[Steve]: Yeah. I think the biggest single factor there, in addition to the standard deduction being increased to $24,000 was the fact that there’s a major limitation on the state and local tax deduction. People with real estate, large real estate tax bills and their income tax paid to the States, uh, is capped it at $10,000. Therefore, if, if you don’t have a lot of mortgage interest and um, your investment fees are not deductible anymore in several other miscellaneous itemized deductions are eliminated, you may be well under the 24,000.
[John]: So you mentioned mortgage interest, but there was, there was also some changes with respect to the mortgage deduction wasn’t there?
[Steve]: Yeah. Th th they put a new cap, the new tax act, put a cap on the amount of mortgage that interest would be deductible on. So the cap, basically your highest mortgage could be $750,000 that on property that you purchase post tax act and that includes your principal residence as well as your vacation home.
[John]: And the limitation before was a million for that.
[Steve]: 1,000,001 actually. Cause you also use your home equity line and be able to spend that 100,000 on anything that you wanted to.
[John]: Hmm. Hmm. So that would affect some as well. That’s and that would actually affect a lot of taxpayers obviously, especially that home, that home interest, um, on the home equity line. So, yeah, I guess moving on, as we talk about and think about retirement planning and savings, was there any big changes that affected that opportunity?
[Steve]: Not really. There weren’t any major changes, but there was an increase in the amount that you’re allowed to be able to, um, shelter or contribute to a 401k an IRA. And you should take a look at that before year end, make sure that you’ve maxed out if you can.
[John]: Okay. Makes sense. And as we think about sort of some of the other big changes, one thing that comes to mind is the significant increase in the uh, estate tax deduction. And I know there’s been a lot of recent press about that. What changed with respect to that and what’s this recent discussion that’s been going on?
[Steve]: Well, part of the tax act and the reform, they basically for two 19 your lifetime exclusion. Um, it was 11 million, 400,000 and that’s for both husband and wife. Uh, and what happened was the concern with a lot of our clients as well is that what if I give away the $11,400,000? And what happens at the end of this, uh, sunset period starting after 2025, the, um, lifetime exclusion goes down, back down to $5 million and they , the IRS, recently came out and, uh, said that they would not try to Claude back, that that amount so that you’re, you’re safe. If you give away 11,400,000, it’s, it’s going to stay out of your estate.
[John]: Wow. So it went from 5 million to 11 million, four and times two, that’s almost 23 million versus 10 million. So that’s a pretty significant change and that’s great that they, they sort of put people’s mind to these with respect to that clawback concept. So, yeah, I guess the last thing that I, I know affected a significant significant number of taxpayers and it was something that was sort of done in response to the favorable changes that affected C corps was this one 99 a deduction as it’s called a qualified business deduction. Um, can you talk a little bit about that and how that ended up playing out for a lot of taxpayers?
[Steve]: Sure. It impacted probably the majority of our, our, our clients in some way or another. Um, uh, of course you get, if you’re a trader business and you, uh, file a schedule C, in other words, you reported on your individual individual income tax return, you get that 20% deduction. Um, if you have a business through an S Corp or a partnership, same deal pass through. There are a lot of complicated rules, uh, relative to the type of business you’re in and limitations there. And then the other thing that was brought to our attention and get clarified, uh, in January of 2019 just before the filing season was the fact that certain rental income, uh, would be eligible for the qualified business income and the 20% deduction.
[John]: Oh, so that must have, that must affected a say, a significant amount of taxpayers who are invested in real estate. So now all of these provisions are essentially a set, a set to sunset at the end of 2025. So barring some change in, uh, leadership, uh, we’re expecting these to sort of remain in effect, but obviously that can change.
[Steve]: Absolutely. And we’re constantly looking at, uh, regulations now that are being finalized with regard to all these tax reform act changes. And every day that seems to be some something coming out without even talking about the States adopting and either adopting the, uh, the new law or, or, uh, doing something, um, different from the new law.
[John]: Well, I’m sure there’s a lot of relief. We have this first year sort of behind us, and we’ll be moving on to the 2020 filing season, hopefully with a little more, uh, knowns upfront. So if you have any questions about how the TCGA affected you or impacted you or opportunities that exist within it, obviously at any time, please feel free to reach out to Steve Gallant or anyone on LGA’s tax team.