New York May Deviate From The New 529 Rules
When the new tax rules were implemented on January 1, 2018, a popular college savings vehicle that goes by the name of a “529 plan” received a boost. Prior to the new tax rules, 529 plans could only be used to pay for college. The new tax rules allow account owners to withdraw up to $10,000 per year per child for K – 12 public school, private school,
When the new tax rules were implemented on January 1, 2018, a popular college savings vehicle that goes by the name of a “529 plan” received a boost. Prior to the new tax rules, 529 plans could only be used to pay for college. The new tax rules allow account owners to withdraw up to $10,000 per year per child for K – 12 public school, private school, religious school, or homeschooling expenses. These distributions would be considered “qualified” which means distributions are made tax free.
Initially we expected this new benefit to be a huge tax advantage for our clients that have children that attend private school. They could fully fund a 529 plan up to $10,000 per year, capture a New York State tax deduction for the $10,000 contribution, and then turn around and distribute the $10,000 from the account to make the tuition payment for their kids.
New York Does Not Allow K – 12 Distributions
States are not required to adhere to the income tax rules set forth by the federal government. In other words, states may choose to adopt the new tax rules set forth by the federal government or they can choose to ignore them. The new tax laws that went into effect in 2018 will impact states differently. More specifically, tax payers in states that have both income taxes and high property taxes, like New York and California, may be adversely affected due to the new $10,000 cap (unchanged for 2025) on the ability to fully deduct those expenses on their federal tax return.
As of May 2025, New York does not recognize the K -12 distributions from 529 plans as “qualified”. Currently more than 30 states have announced that they will adhere to the new federal tax rules allowing K-12 qualified distributions from 529 accounts. On the opposite side of that coin, the following states do not recognize K-12 distributions as qualified: California, Illinois, Michigan, Minnesota, Nebraska, New Jersey, New York, Orgeon, and Vermont.
About Michael……...
Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.
Moving Expenses Are No Longer Deductible
If you were planning on moving this year to take a new position with a new company or even a new position within your current employer, the moving process just got a little more expensive. Not only is it expensive, but it can put you under an intense amount of stress as there will be lots of things that you need to have in place before packing up and
If you were planning on moving this year to take a new position with a new company or even a new position within your current employer, the moving process just got a little more expensive. Not only is it expensive, but it can put you under an intense amount of stress as there will be lots of things that you need to have in place before packing up and moving. Even things like how you are going to transport your car over to your new home, can take up a lot of your time, and on top of that, you have to think about how much it's going to cost. Prior to the tax law changes that took effect January 1, 2018, companies would often offer new employees a "relocation package" or "moving expense reimbursements" to help subsidize the cost of making the move. From a tax standpoint, it was great benefit because those reimbursements were not taxable to the employee. Unfortunately that tax benefit has disappeared in 2018 as a result of tax reform.
Taxable To The Employee
Starting in 2018, moving expense reimbursements paid to employee will now represent taxable income. Due to the change in the tax treatment, employees may need to negotiate a higher expense reimbursement rate knowing that any amount paid to them from the company will represent taxable income.
For example, let’s say you plan to move from New York to California and you estimate that your moving expense will be around $5,000. In 2017, your new employer would have had to pay you $5,000 to fully reimburse you for the moving expense. In 2018, assuming you are in the 35% tax bracket, that same employer would need to provide you with $6,750 to fully reimburse you for your moving expenses because you are going to have to pay income tax on the reimbursement amount.
Increased Expense To The Employer
For companies that attract new talent from all over the United States, this will be an added expense for them in 2018. Many companies limit full moving expense reimbursement to executives. Coincidentally, employees at the executive level are usually that highest paid. Higher pay equals higher tax brackets. If you total up the company's moving expense reimbursements paid to key employees in 2017 and then add another 40% to that number to compensate your employees for the tax hit, it could be a good size number.
Eliminated From Miscellaneous Deductions
As an employee, if your employer did not reimburse you for your moving expenses and you had to move at least 50 miles to obtain that position, prior to 2018, you were allowed to deduct those expenses when you filed your taxes and you were not required to itemize to capture the deduction. However, this expense will no longer be deductible even for employees that are not reimbursed by their employer for the move starting in 2018.
About Michael.........
Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.
Warning To All Employees: Review The Tax Withholding In Your Paycheck Otherwise A Big Tax Bill May Be Waiting For You
As a result of tax reform, the IRS released the new income tax withholding tables in January and your employer probably entered those new withholding amounts into the payroll system in February. It was estimated that about 90% of taxpayers would see an increase in their take home pay once the new withholding tables were implemented.
As a result of tax reform, the IRS released the new income tax withholding tables in January and your employer probably entered those new withholding amounts into the payroll system in February. It was estimated that about 90% of taxpayers would see an increase in their take home pay once the new withholding tables were implemented. While lower tax rates and more money in your paycheck sounds like a good thing, it may come back to bite you when you file your taxes.
The Tax Withholding Guessing Game
Knowing the correct amount to withhold for federal and state income taxes from your paycheck is a bit of a guessing game. Withhold too little throughout the year and when you file your taxes you have a tax bill waiting for you equal to the amount of the shortfall. Withhold too much and you will receive a big tax refund but that also means you gave the government an interest free loan for the year.
There are two items that tell your employer how much to withhold for federal income tax from your paycheck:
Income Tax Withholding Tables
Form W-4
The IRS provides your employer with the Income Tax Withholding Tables. On the other hand, you as the employee, complete the Form W-4 which tells your employer how much to withhold for taxes based on the “number of allowances” that you claim on the form.
What Is A W-4 Form?
The W-4 form is one of the many forms that HR had you complete when you were first hired by the company. Here is what it looks like:
Section 3 of this form tells your employer which withholding table to use:
Single
Married
Married, but withhold at higher Single Rate
Section 5 tells your employer how many "allowances" you are claiming. Allowance is just another word for "dependents". The more allowances your claim, the lower the tax withholding in your paycheck because it assumes that you will have less "taxable income" because in the past you received a deduction for each dependent. This is where the main problem lies. Due to the changes in the tax laws, the tax deduction for personal exemptions was eliminated. This may adversely affect some taxpayers the were claiming a high number of allowances on their W-4 form because even though the number of their dependents did not change, their taxable income may be higher in 2018 because the deduction for personal exemptions no longer exists.
Even though everyone should review their Form W-4 form this year, employees that claimed allowances on their W-4 form are at the highest risk of either under withholding or over withholding taxes from their paychecks in 2018 due to the changes in the tax laws.
How Much Should I Withhold From My Paycheck For Taxes?
So how do you go about calculating that right amount to withhold from your paycheck for taxes to avoid an unfortunate tax surprise when you file your taxes for 2018? There are two methods:
Ask your accountant
Use the online IRS Withholding Calculator
The easiest and most accurate method is to ask your personal accountant when you meet with them to complete your 2017 tax return. Bring them your most recent pay stub and a blank Form W-4. Based on the changes in the tax laws, they can assist you in the proper completion of your W-4 Form based on your estimated tax liability for the year.If you complete your own taxes, I would highly recommend visiting the updated IRS Withholding Calculator. The IRS calculator will ask you a series of questions, such as:
How many dependents you plan to claim in 2018
Are you over the age of 65
The number of children that qualify for the dependent care credit
The number of children that will qualify for the new child tax credit
Estimated gross wages
How much fed income tax has already been withheld year to date
Payroll frequency
At the end of the process it will provide you with your personal results based on the data that you entered. It will provide you with guidance as to how to complete your Form W-4 including the number of allowances to claim and if applicable, the additional amount that you should instruct your employer to withhold from your paycheck for federal income taxes. Additional withholding requests are listed in Section 6 of the Form W-4.
Avoid Disaster
Having this conversation with your accountant and/or using the new IRS Withholding Calculator will help you to avoid a big tax disaster in 2018. Unfortunately, many employees may not learn about this until it's too late. Employees that are used to getting a tax refund may find out in the spring of next year that they owe thousands of dollars to the IRS because the combination of the new tax tables and the changes in the tax law that caused them to inadvertently under withhold federal income taxes throughout the year.
Action Item!!
Take action now. The longer you wait to run this calculation or to have this conversation with your accountant, the larger the adjustment may be to your paycheck. It's easier to make these adjustments now when you have nine months left in the year as opposed to waiting until November.I would strongly recommend that you share this article with your spouse, children in the work force, and co-workers to help them avoid this little known problem. The media will probably not catch wind of this issue until employees start filing their tax returns for 2018 and they find out that there is a tax bill waiting for them.
About Michael.........
Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.
No Deduction For Entertainment Expenses In 2019. Ouch!!
There is a little known change that was included in tax reform that will potentially have a big impact on business owners. The new tax laws that went into effect on January 1, 2018 placed stricter limits on the ability to deduct expenses associated with entertainment and business meals. Many of the entertainment expenses that businesses
There is a little known change that was included in tax reform that will potentially have a big impact on business owners. The new tax laws that went into effect on January 1, 2018 placed stricter limits on the ability to deduct expenses associated with entertainment and business meals. Many of the entertainment expenses that businesses were able to deduct in 2017 will no longer we allowed in 2018 and beyond. A big ouch for business owners that spend a lot of money entertaining clients and prospects.
A Quick Breakdown Of The Changes
new tax rules for entertainment expenses
No Deduction in 2019
Prior to 2018, if the business spent money to take a client out to a baseball game, meet a client for 18 holes of golf, or to host a client event, the business would be able to take a deduction equal to 50% of the total cost associated with the entertainment expense. Starting in 2018, you get ZERO. There is no deduction for those expenses.
The new law specifically states that there is no deduction for:
Any activity generally considered to be entertainment, amusement, or recreation
Membership dues to any club organization for recreation or social purpose
A facility, or portion thereof, used in connection with the above items
This will inevitably cause business owners to ask their accountant: “If I spend the same amount on entertainment expenses in 2018 as I did in 2017, how much are the new tax rules going to cost me tax wise?”
Impact On Sales Professionals
If you are in sales and big part of your job is entertaining prospects in hopes of winning their business, if your company can no longer deduct those expenses, are you going to find out at some point this year that the company is going to dramatic limit the resources available to entertain clients? If they end up limiting these resources, how are you supposed to hit your sales numbers and how does that change the landscape of how you solicit clients?
Impact On The Entertainment Industry
This has to be bad news for golf courses, casinos, theaters, and sports arena. As the business owner, if you were paying $15,000 per year for your membership to the local country club and you justified spending that amount because you knew that you could take a tax deduction for $7,500, now what? Now that you can’t deduct any of it, you may decide to cancel your membership or seek out a cheaper alternative.
Impact On Charitable Organizations
How do most charities raise money? Events. As you may have noticed in the chart, in 2017 tickets to a qualified charitable event were 100% deductible. In 2018, it goes from 100% deductible to Zero!! It’s bad enough that the regular entertainment expenses went from 50% to zero but going from 100% to zero hurts so much more. Also charitable events usually have high price tags because they have to cover the cost of event and raise money for the charity. In 2018, it will be interesting to see how charitable organizations get over this hurdle. It may have to disclose right on the registration form for the event that the ticket cost is $500 but $200 of that amount is the cost of the event (non-deductible) and $300 is the charitable contribution.
Exceptions To The New Rules
There are some unique exceptions to the new rules. Many business owners will not find any help within these exceptions but here they are:
Entertainment, amusement, and recreation expenses you treat as compensation to your employees in their wages (In other words, the cost ends up in your employee’s W2)
Expenses for recreation, social, or similar activities, including facilities, primarily for employees, and it can’t be highly compensation employees (“HCE”). In 2018 an HCE employee is an employee that makes more than $120,000 or is a 5%+ owners of the company.
Expenses for entertainment goods, services, and facilities that you sell to customers
What’s The Deal With Meals?
Prior to 2018, employers could deduct 50% of expenses for business-related meals while traveling. Also meals provided to an employee for the convenience of the employer on the employer’s business premises were 100% deductible by the employer and tax-free to the recipient employee.
Starting in 2018, meal expenses incurred while traveling on business remain 50% deductible to the business. However, meals provided via an on-premises cafeteria or otherwise on the employers premise for the convenience of the employer will now be limited to a 50% deduction.
There is also a large debate going on between tax professional as to which meals or drinks may fall into the “entertainment” category and will lose their deduction entirely.
Impact On Business
This is just one of the many “small changes” that was made to the new tax laws that will have a big impact on many businesses. It may very well change the way that businesses spend money to attract new clients. This in turn will most likely lead to unintended negative consequences for organizations that operate in the entertainment, catering, and charitable sectors of the U.S. economy.
Disclosure: For education purposes only. Please seek tax advice from your tax professional
About Michael……...
Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.
More Taxpayers Will Qualify For The Child Tax Credit
There is great news for parents in the middle to upper income tax brackets in 2018. The new tax law dramatically increased the income phaseout threshold for claiming the child tax credit. In 2017, parents were eligible for a $1,000 tax credit for each child under the age of 17 as long as their adjusted gross income (“AGI”) was below $75,000 for single
There is great news for parents in the middle to upper income tax brackets. The new tax law dramatically increased the income phase-out threshold for claiming the child tax credit. In 2017, parents were eligible for a $1,000 tax credit for each child under the age of 17 as long as their adjusted gross income (“AGI”) was below $75,000 for single filers and $110,000 for married couples filing a joint return. If your AGI was above those amounts, the $1,000 credit was reduced by $50 for every $1,000 of income above those thresholds. In other words, the child tax credit completely phased out for a single filer with an AGI greater than $95,000 and for a married couple with an AGI greater than $130,000.
Note: If you are not sure what the amount of your AGI is, it’s the bottom line on the first page of your tax return (Form 1040).
New Phaseout Thresholds Beginning In 2018
Starting in 2018 and for years going forward, the new phaseout thresholds for the Child Tax Credit begin at the following AGI levels:
Single Filer: $200,000
Married Filing Joint: $400,000
If your AGI falls below these thresholds, you are eligible for the full Child Tax Credit. For taxpayers with an AGI amount that exceeds these thresholds, the phaseout calculation is the same as 2017. The credit is reduced by $50 for every $1,000 in income over the AGI threshold.
Wait......It Gets Better
Not only will more families now qualify for the child tax credit but the amount of the credit was doubled. The new tax law increased the credit from $1,000 to $2,000 for each child under the age of 17.
In 2025, a married couple, with three children, with an AGI of $200,000, would have received nothing for the child tax credit. Now, that same family will receive a $6,000 tax credit. That’s huge!! Remember, “tax credits” are more valuable than “tax deductions”. Tax credits reduce your tax liability dollar for dollar whereas tax deductions just reduce the amount of your income subject to taxation.
This information is for educational purposes only. Please consult your accountant for personal tax advice.
About Michael……...
Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.
Business Owners: Strategies To Reduce Your Taxable Income To Qualify For The New 20% Qualified Business Income Deduction
Now that small business owners have the 20% deduction available for their pass-through income in 2018, as a business owner, you will need to begin to position your business to take full advantage of the new tax deduction. However, the Qualified Business Income ("QBI") deduction has taxable income thresholds. Once the owner's personal taxable
Many small business owners have a QBI 20% deduction available for their pass-through income, but you may need to position your business to take full advantage of this lucrative tax deduction. It’s important to be aware that the Qualified Business Income ("QBI") deduction has taxable income thresholds. Once the owner's personal taxable income exceeds specific dollar amounts, the 20% deduction will either phase out or trigger an alternative calculation that could lower the deduction.
The Taxable Income Thresholds
Regardless of whether you are considered a “services business” or “non-services business” under the new tax law, you will need to be aware of the following income thresholds:
Individual: $197,300
Married: $394,600
These threshold amounts are based on the “total taxable income” listed on the tax return of the business owner. Not “AGI” and not just the pass-through income from the business. Total taxable income. For example, if I make $100,000 in net profit from my business and my wife makes $400,000 in W-2 income, our total taxable income on our married filing joint tax return is going to be way over the $394,600 threshold. So do we completely lose the 20% deduction on the $100,000 in pass-through income from the business? Maybe not!!
The Safe Zone
For many business owners, to maximize the new 20% deduction, they will do everything that they can to keep their total taxable income below the thresholds. This is what I call the “safe zone”. If you keep your total taxable income below these thresholds, you will be allowed to take your total qualified business income, multiply it by 20%, and you’re done. Once you get above these thresholds, the 20% deduction will either begin to phase out or it will trigger the alternative 50% of W-2 income calculation which may reduce the deduction. The phase out ranges are listed below:
Individuals: $197,300 to $247,300
Married: $394,600 to $494,600
As you get closer to the top of the range the deduction begins to completely phase out for “services businesses” and for “non-services business” the “lesser of 20% of QBI or 50% of wages paid to employees” is fully phased in.
What Reduces "Total Taxable Income"?
There are four main tools that business owners can use to reduce their total taxable income:
Standard Deduction or Itemized Deductions
Self-Employment Tax
Retirement Plan Contributions
Timing Expenses
Standard & Itemized Deductions
Since tax reform eliminated many of the popular tax deductions that business owners have traditionally used to reduce their taxable income, for the first time in 2018, a larger percentage of business owners elected to take the standard deduction instead of itemizing. You do not need to itemize to capture the 20% deduction for your qualified business income. This will allow business owners to take the higher standard deduction and still capture the 20% deduction on their pass-through income. Whether you take the standard deduction or continue to itemize, those deductions will reduce your taxable income for purposes of the QBI income thresholds.
Example: You are a business owner, you are married, and your only source of income is $400,000 from your single member LLC. At first look, it would seem that your total income is above the $383,900 threshold and you are subject to the phase out calculation. However, if you elect the standard deduction for a married couple filing joint, that will reduce your $400,000 in gross income by the $30,000 standard deduction which brings your total taxable income down to $370,000. Landing you below the threshold and making you eligible for the full 20% deduction on your qualified business income.
The point of this exercise is for business owners to understand that if your gross income is close to the beginning of the phase out threshold, somewhere within the phase out range, or even above the phase out range, there may be some relief in the form of the standard deduction or your itemized deductions.
Self-Employment Tax
Depending on how your business is incorporated, you may be able to deduct half of the self-employment tax that you pay on your pass-through income. Sole proprietors, LLCs, and partnership would be eligible for this deduction. Owners of S-corps receive W2 wages to satisfy the reasonable compensation requirement and receive pass-through income that is not subject to self-employment tax. So this deduction is not available for S-corps.
The self-employment tax deduction is an “above the line” deduction which means that you do not need to itemize to capture the deduction. The deduction is listed on the first page of your 1040 and it reduces your AGI.
Example: You are a partner at a law firm, not married, the entity is taxed as a partnership, and your gross income is $250,000. Like the previous example, it looks like your income is over the $197,300 threshold for a single tax filer. But you have yet to factor in your tax deductions. For simplicity, let’s assume you take the standard deduction:
Total Pass-Through Income: $250,000
Less Standard Deduction: ($15,000)
Less 50% Self-Employ Tax: ($15,000) $200,000 x 7.5% = $15,000
Total Taxable Income: $220,000
While your total taxable income did not get you below the $197,300 threshold, you are now only mid-way through the phase out range so you will capture a portion of the 20% deduction on your pass-through income.
Retirement Plans – "The Golden Goose"
Retirement plans will be the undisputed Golden Goose for purposes of reducing your taxable income for purposes of the qualified business income deduction. Take the example that we just went through with the attorney in the previous section. Now, let’s assume that same attorney maxes out their pre-tax employee deferrals in the company’s 401(k) plan. The limit in 2025 for employees under the age of 50 is $23,500.
Total Pass-Through Income: $250,000
Less Standard Deduction: ($15,000)
Less 50% Self-Employ Tax: ($15,000)
Pre-Tax 401(k) Contribution: ($23,500)
Total Taxable Income: $196,500
Jackpot!! That attorney has reduced their taxable income below the $197,300 QBI threshold and they will be eligible to take the full 20% deduction against their pass-through income.
Retirement plan contributions are being looked at in a new light starting since 2018. Not only are you reducing your tax liability by shelter your income from taxation but now, under the new rules, you are simultaneously increasing your QBI deduction amount.
When tax reform was in the making there were rumors that Congress may drastically reduce the contribution limits to retirement plans. Thankfully this did not happen. Long live the goose!!
Start Planning Now
Knowing that this Golden Goose exists, business owners will need to ask themselves the following questions:
How much should I plan on contributing to my retirement accounts this year?
Is the company sponsoring the right type of retirement plan?
Should we be making changes to the plan design of our 401(k) plan?
How much will the employer contribution amount to the employees increase if we try to max out the pre-tax contributions for the owners?
Business owners are going to need to engage investment firms and TPA firms that specialize in employer sponsored retirement plan. Up until now, sponsoring a Simple IRA, SEP IRA, or 401(K), as a way to defer some income from taxation has worked but tax reform will require a deeper dive into your retirement plan. The golden question:
“Is the type of retirement plan that I’m currently sponsoring through my company the right plan that will allow me to maximize my tax deductions under the new tax laws taking into account contribution limits, admin fees, and employer contributions to the employees.”
If you are not familiar with all of the different retirement plans that are available for small businesses, please read our article “Comparing Different Types Of Employer Sponsored Plans”.
DB / DC Combo Plans Take Center Stage
While DB/DC Combo plans have been around for a number of years, you will start to hear more about them going forward. A DB/DC Combo plan is a combination of a Defined Benefit Plan (Pension Plan) and a Defined Contribution Plan (401k Plan). While pension plans are usually only associated with state and government employers or large companies, small companies are eligible to sponsor pension plans as well. Why is this important? These plans will allow small business owners that have total taxable income well over the QBI thresholds to still qualify for the 20% deduction.
While defined contribution plans limit an owner’s aggregate pre-tax contribution to $70,000 per year in 2025 ($77,500 for owners age 50+), DB/DC Combo plans allow business owners to make annual pre-tax contributions ranging from $60,000 – $345,000 per year. Yes, per year!!
Example: A married business owner makes $600,000 per year and has less than 5 full time employees. Depending on their age, that business owner may be able to implement a DB/DC Combo plan prior to December 31, 2025, make a pre-tax contribution to the plan of $345,000, and reduce their total taxable income below the $383,900 QBI threshold.
Key items to make these plans work:
You need to have the cash to make the larger contributions each year
These DB/DC plan needs to stay in existence for at least 3 years
This plan design usually works for smaller employers (less than 10 employees)
Shelter Your Spouse's W-2 Income
It's not uncommon for a business owner to have a spouse that earns W-2 wages from employment outside of the family business. Remember, the QBI thresholds are based on total taxable income on the joint tax return. If you think you are going to be close to the phase out threshold, you may want to encourage your spouse to start putting as much as they possibly can pre-tax into their employer's retirement plan. Unlike self-employment income, W-2 income is what it is. Whatever the number is on the W-2 form at the end of the year is what you have to report as income. By contrast, business owners can increase expenses in a given year, delay bonuses into the next tax year, and deploy other income/expense maneuvers to play with the amount of taxable income that they are showing for a given tax year.
Timing Expenses
One of the last tools that small business owners can use to reduce their taxable income is escalating expense. Now, it would be foolish for businesses to just start spending money for the sole purpose of reducing income. However, if you are a dental practice and you were planning on purchasing some new equipment in 2025 and purchasing a software system in 2026, depending on where your total taxable income falls, you may have a tax incentive to purchase both the equipment and the software system all in 2025. As you get toward the end of the tax year, it might be worth making that extra call to your accountant, before spending money on those big ticket items. The timing of those purchases could have big impact on your QBI deduction amount.
Disclosure: The information in this article is for educational purposes. For tax advice, please consult your tax advisor.
About Michael.........
Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.
How Much Will The Value Of Your House Drop Under The New Tax Law?
It's not a secret to anyone at this point that the new tax bill is going to inflict some pain on the U.S. housing market in 2018. The questions that most homeowners and real estate investors are asking is: "How much are home prices likely to decrease within the next year due to the tax changes?" The new $10,000 limitation on SALT deductions, the lower
It's not a secret to anyone at this point that the new tax bill is going to inflict some pain on the U.S. housing market in 2018. The questions that most homeowners and real estate investors are asking is: "How much are home prices likely to decrease within the next year due to the tax changes?" The new $10,000 limitation on SALT deductions, the lower deduction cap mortgages interest, and the higher standard deduction are all lining up to take a bite out of real estate prices. The size of the bite will largely depend on where you live and the value of your house.
3 Bites That Will Hurt
The Trump tax reform made three significant changes to the tax laws that will impact housing prices:
Capped state and local tax ("SALT") deductions at $10,000 (includes property taxes)
Lowered the deduction cap on the first $750,000 of a mortgage
Doubled the standard deduction
The New Standard Deduction
There is a reason why I'm starting this analysis with the doubling of the standard deduction in 2018. For many households in the U.S., the doubling of the standard deduction will make the cap on the SALT deductions irrelevant. Let me explain. Below is a comparison of the standard deduction limits in 2017 versus 2018:
new standard deduction
In 2018, a married couple filing a joint tax return would need over $24,000 in itemized deductions to justify not taking the standard deduction and calling it a day. For a married couple, both W-2 employees, $7,000 in property taxes, $9,000 in state income taxes, if those are their only itemized deductions, then it will most likely makes sense for them to take the $24,000 standard deduction. So the $10,000 cap on property taxes and state income taxes becomes irrelevant because it’s an itemized deduction. This will be a big change for many U.S. households. In 2017, that same family may have itemized because their property and state taxes exceeded the $12,700 standard deduction threshold.
For taxpayers age 65 and older, the new tax law kept the additional standard deduction amounts: $1,250 for single filers and $2,500 for married filing joint which are over and above the normal limits.
$10,000 Cap On State & Local Taxes
Starting in 2018, taxpayers are limited to a $10,000 deduction for a combination of their property taxes, school taxes, and state & local income tax. For states that have both high property taxes and high income taxes like New York, New Jersey, and California, homeowners will most likely be looking at a larger decrease in the value of their homes versus states like Florida that have lower property taxes and no state income taxes. The houses with the higher dollar value may experience a larger drop in price.
If you live in a $200,000 house, the property / school taxes are $5,000, and you decided to sell your house, the family looking to buy your house may already be planning on taking the $24,000 standard deduction at that income level, so the new tax cap would not really decrease the “value” of the house to the potential buyer.
On the flip side, if you own a $600,000 house, your property/school taxes are $18,000, and you are looking to sell your house, the new $10,000 cap will most likely have a negative impact on the value of your house. As you might assume, the individuals and families with the higher incomes that could afford to purchase a $600,000 house will naturally be the homeowners that will continue to itemize their deduction in 2018. So owning that $600K house in 2018 comes at an additional annual cost to the buyer because they lose $8,000 in property tax deductions. For individuals and families in the top federal tax bracket (37%), the cost to live in that house just went up by $3,120 per year. I have personally already had two clients call me that just purchased a house in 2017 with property taxes above the $10,000 cap and they said “I might not have purchased this big of a house if I knew I was not going to be able to deduct all of the property taxes”.
$750,000 Deduction Cap On Mortgages
Prior to 2018, taxpayers could only deduct interest on the first $1,000,000 of a mortgage. For all new mortgages, beginning in 2018, the cap was reduced from $1,000,000 to $750,000. The new tax law grandfathered the $1M cap for mortgages that were already in existence prior to December 31, 2017. Obviously this change will only impact very high income earning individuals and families living in houses valued at $1M+ but it still may have a negative impact on the prices of those big houses. I say "may" because if you can afford a $3M condo in Manhattan, you may not care that you lost a $7,500 tax deduction.
It Depends Where You Live
Given these changes to tax law, it seems likely that the states with higher property taxes and higher home values will be the most vulnerable to price adjustments. Below is a map, from Zillow and Credit Suisse, showing the median home price by state:
median home price
Let's also locate the states that have a high concentration of mortgages over $500,000. As mentioned above, this may put price pressure on homeowners trying to sell houses above the new $750,000 mortgage interest deduction threshold:
states with high mortgages
And the "Non-Winners" are New York, California, and New Jersey. Moody's published a list of the 25 counties that are expect to lose the largest percentage of value. Note, that only six of those counties are located outside of New York or New Jersey:
tax reform impact on housing prices
To bring it all together, Moody's and FHFA published the illustration below showing the percentage change in the Federal Housing Finance Agency – House Price Index as a result of the new tax bill:
house price decline
It's safe to assume that geographically, the negative impact that the new tax rules will have on the U.S. house market will occur in concentrated pockets as opposed to a widespread reduction in housing prices across the country.
Do Not Move To Alaska Just Yet!!
Before you show the chart above to your family at dinner tonight with a “Go Alaska” hat on, I urge you to read on. (Disclosure, I have nothing against Alaska. I was born in Fairbanks, Alaska) If you live in one of the “red spots” on the heat map above or in one of the counties in the list of “where home prices could stall after tax reform”, the charts above do not necessarily mean that at the end of 2018 your house is going to be worth 5% less than it was at the beginning of 2018. Moody’s has done the comparison of the tax bill passing versus no tax bill. If prior to the tax bill being passed it was estimated in 2018 that homes in your area were going to increase in value by 5% and the heat map above shows a 4% drop as a result of tax reform, then that means instead the value of your home growing by 5% it may only grow by 1%.
As with any forecast, it’s anyone’s guess at this point how the math will actually work itself out but in general I think it will be more positive than the consensus expects.
House Values Under $250,000 – Status Quo
Given the changes to the tax law, if you live in a house that is valued under $250,000, regardless of where you live, the downward pressure on the price of your house as a result of tax reform should be minimal. Why? Most buyers in this range will most likely be electing the standard deduction anyways so the new $10,000 cap on SALT deductions should have little to no impact. This should even be true for states that have high property taxes because the homeowners would need over $24,000 in itemized deductions before the $10,000 cap would potentially hurt them tax wise.
The Sandwich: House Values $250,000 - $750,000
The homeowners at the highest risk of a reduction in the value of their house are located in what I call “The Sandwich”. They have a house that is valued somewhere between $250,000 – $750,000 and they live in a high property tax state. While Congress touts that the doubling of the standard deduction is a “fix all” for all of the tax deductions that have been taken away, it’s unfortunately not. There are a number of individuals and families that are in the income range customarily associated with buying a $250K – $750K house that may actually pay more in taxes under the new rules.
Taxpayers in this group are also moving from their “starter house” in their first “big house”. Unlike the super wealthy that may care less about paying an extra $5,000 in taxes per year, for an upper middle class family that has kids, that is saving for college, and contributing to 401(k) plans, the loss of that tax benefit may mean they can’t take a family vacation if they buy that bigger house. Less buyers in the market for houses in this “Sandwich” range translates to lower prices.
How much lower? Probably nothing dramatic in the short term because the U.S. economy is doing so well. When the economy is growing, people feel secure in their jobs, wages are going up, workers are getting bonuses, and that provides them with the additional income needed to make that larger mortgage payment and pay a little more in taxes.
My concern would be for someone that is planning to purchase a house and then sell within the next 5 years. If the economy goes into a recession, people start losing their jobs, and the U.S. consumer starts look for more ways to stretch their dollars, the homeowners that stretched themselves to buy the bigger house based on the big bonus that they received when the economy was humming are at a big risk of losing their house. In addition, there may be fewer buyers in the market because families may not want to waste money on property taxes that they can’t deduct.
The Millionaire Club: House Values $750,000+
It would seem that houses in the $750,000+ range have the most lose to for two reasons. First, homeowners in this category pay the highest property taxes and they are typically not electing the standard deduction at this income level. Second, home buyers at this price point would also be negatively impacted by the lower $750,000 cap on the mortgage interest deduction.
But I doubt this will be the case. Why? There is only so much lake front property. If you make over $5M per year and you fall in love with a lake house in upstate New York that has a $1.5M price tag, while you could try to find a similar lake house in a more tax friendly state, if you make $5M per year, what’s another $15,000 in expenses for buy your first choice.
About Michael.........
Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.
Will Home Equity Loan Interest Be Deductible In 2019+?
The answer............it depends. It depends on what you used or are going to use the home equity loan for. Up until the end of 2017, borrowers could deduct interest on home equity loans or homes equity lines of credit up to $100,000. Unfortunately, many homeowners will lose this deduction under the new tax law that takes effect January 1, 2018.
The answer............it depends. It depends on what you used or are going to use the home equity loan for. Up until the end of 2017, borrowers could deduct interest on home equity loans or homes equity lines of credit up to $100,000. Unfortunately, many homeowners will lose this deduction under the new tax law that takes effect January 1, 2018.
Old Rules
Taxpayers used to be able to take a home equity loan or tap into a home equity line of credit, spend the money on whatever they wanted (pool, college tuition, boat, debt consolidation) and the interest on the loan was tax deductible. For borrowers in higher tax brackets this was a huge advantage. For a taxpayer in the 39% fed tax bracket, if the interest rate on the home equity loan was 3%, their after tax interest rate was really 1.83%. This provided taxpayers with easy access to cheap money.
The Rules Are Changing In 2018
To help pay for the new tax cuts, Congress had to find ways to bridge the funding gap. In other words, in order for some new tax toys to be given, other tax toys needed to be taken away. One of those toys that landed in the donation box was the ability to deduct the interest on home equity loans and home equity lines of credit. But all may not be lost. The tax law splits "qualified residence interest" into two categories:
Acquisition Indebtedness
Home Equity Indebtedness
Whether or not your home equity loan or HELOC is considered acquisition indebtedness or home equity indebtedness may ultimately determine whether or not the interest on that loan will continue to be deductible in 2018 and future years under the new tax rules. I say "may" because we need additional guidance form the IRS as to how the language in the tax bill will be applied in the real world. As of right now you have some tax professionals stating that all interest from homes equity sources will be disallowed beginning in 2018 and other tax professionals taking the position that home equity loans from acquisition indebtedness will continue to be eligible for the tax deduction in 2018. For the purpose of this article, we will assume that the IRS will continue to allow the deduction of interest on home equity loans and HELOCs associated with acquisition indebtedness.
Acquisition Indebtedness
Acquisition indebtedness is defined as “indebtedness that is secured by the residence and that is incurred in acquiring, constructing, or substantially improving any qualified residence of the taxpayer”. It seems likely, under this definition, if you took out a home equity loan to build an addition on your house, that would be classified as a “substantial improvement” and you would be able to continue to deduct the interest on that home equity loan in 2018. Where we need help from the IRS is further clarification on the definition of “substantial improvement”. Is it any project associated with the house that arguably increases the value of the property?
More good news, this ability to deduct interest on home equity loans and HELOCs for debt that qualifies as “acquisition indebtedness” is not just for loans that were already issued prior to December 31, 2017 but also for new loans.
Home Equity Indebtedness
Home equity indebtedness is debt incurred and secured by the residence that is used for items that do not qualify as "acquisition indebtedness". Basically everything else. So beginning in 2018, interest on home equity loans and HELOC's classified as "home equity indebtedness" will not be tax deductible.
No Grandfathering
Unfortunately for taxpayers that already have home equity loans and HELOCs outstanding, the Trump tax reform did not grandfather the deduction of interest for existing loans. For example, if you took a home equity loan in 2016 for $20,000 and there is still a $10,000 balance on the loan, you will be able to deduct the interest that you paid in 2017 but beginning in 2018, the deduction will be lost if it does not qualify as "acquisition indebtedness".
Partial Deduction
An important follow-up question that I have received from clients is: “what if I took a home equity loan for $50,000, I used $30,000 to renovate my kitchen, but I used $20,000 as a tuition payment for my daughter? Do I lose the deduction on the full outstanding balance of the loan because it was not used 100% for substantial improvements to the house? Great question. Again, we need more clarification on this topic from the IRS but it would seem that you would be allowed to take a deduction of the interest for the portion of the loan that qualifies as “acquisition indebtedness” but you would not be able to deduct the interest attributed to the “non-acquisition or home equity indebtedness”.
Time out……how do you even go about calculating that if it’s all one loan? Even if I can calculate it, how is the IRS going to know what portion of the interest is attributed to the kitchen project and which portion is attributed to the tuition payment? More great questions and we don’t have answers to them right now. These are the types of issues that arise when you rush major tax reform through Congress and then you make it effective immediately. There is a laundry list of unanswered questions and we just have to wait for clarification on from the IRS.
Itemized Deduction
An important note about the deduction of interest on a home equity loan or HELOC, it's an itemized deduction. You have to itemize in order to capture the tax benefit. Since the new tax rules eliminated or limited many of the itemized deductions available to taxpayers and increased the standard deduction to $12,000 for single filers and $24,000 for married filing joint, many taxpayers who previously itemized will elect the standard deduction for the first time in 2018. In other word, regardless of whether or not the IRS allows the deduction for home equity loan interest assigned to acquisition indebtedness, very few taxpayers will reap the benefits of that tax deduction because your itemized deductions would need to exceed the standard deduction thresholds before you would elect to itemize.
Will This Crush The Home Equity Loan Market?
My friends in the banking industry have already started to ask me, “what impact do you think the new tax rules will have on the home equity loan market as a whole?” It obviously doesn’t help but at the same time I don’t think it will deter most homeowners from accessing home equity indebtedness. Why? Even without the deduction, home equity will likely remain one of the cheapest ways to borrow money. Typically the interest rate on home equity loans and HELOCs are lower because the loan is secured by the value of your house. Personal loans, which typically have no collateral, are a larger risk to the lender, so they charge a higher interest rate for those loans.
Also, for most families in the United States, the primary residence is their largest asset. A middle class family may not have access to a $50,000 unsecured personal loan but if they have been paying down their mortgage for the past 15 years, they may have $100,000 in equity in their house. With the cost of college going up and financial aid going down, for many families, accessing home equity via a loan or a line of credit may be the only viable option to help bridge the college funding gap.
About Michael.........
Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.
