New Tax Law, How Will It Affect You?
You have heard by now that at the end of 2017 our president signed a tax bill that made sweeping changes starting in 2018. It’s the most comprehensive tax bill in more than 30 years. While many of the concepts in this bill have been talked about for years, the details really came together in a hurry. So, let’s take a peek at some of the provisions that may impact you the most.
Many changes here, starting with generally an across the-board decrease in individual tax rates, a new limit on deductibility of mortgage interest on home debt exceeding $750,000, no deduction for home equity interest, a substantial increase in the standard deduction, a deduction limitation of $10,000 on state/local income and property taxes, elimination of most miscellaneous itemized deductions and personal exemptions, and a doubling of the child tax credit.
Many individuals are also owners of “pass-through” businesses such as sole proprietorships, partnerships, limited liability companies, and S corporations. Under a brand new concept, and one of the most complicated yet valuable provisions in the law, up to 20% of their net “Qualified Business Income” may not be taxed at all. Even businesses providing “personal services” in the fields of health, law, accounting, consulting and similar areas are eligible for this deduction, subject to certain taxable income thresholds (see below).
Real Estate Professionals
The big change here is the pass-through deduction noted above. The current view is that generally the income of real estate brokers and agents is related to personal services. This means that in order to be eligible for the 20% deduction of your business income, your taxable income for the year must be less than $157,500 (for single taxpayers) and $315,000 (for couples filing jointly). If taxable income is greater than these amounts, your deduction is either severely limited or not available at all. Another change likely to impact you is the elimination of any deduction for entertainment expenses. So, while business meals continue to be subject to a 50% limitation, not deductible at all are costs related to attending sporting events or shows, or taking your client to a club for entertainment.
Miscellaneous, But Important
You may know that by far the largest portion of the total tax cuts in this bill go to C corporations. Though not directly tied to your industry, many of these entities will receive at least a 40% reduction in tax rates. As a result, some of the largest multi-national corporations have already announced ambitious hiring plans and are paying special bonuses to their employees.
Excluded from the final bill were many potential changes either discussed or in prior versions. One of these involved changing the gain exclusion rules on the sale of a principal residence. This would have had a very negative impact on the real estate market.
On its face, these changes are both positive and negative but beware, people in seemingly similar situations could be impacted very differently. Also, stay tuned because the IRS needs to publish a lot of guidance on this new tax law. Our advice is to learn as much as you can from available resources, such as your trade associations, targeted internet searches, and your professional advisors. But make no mistake, many people will wind up having more money in their pockets and will look to put it into their houses!