Tax Reform: Things To Do Before December 31st

This week, House and Senate Republicans reached a deal on a final tax bill and it appears they will try to pass the bill before the end of the year. Don't worry, this isn't a lengthy summary of everything that's in the bill. I'm pretty sure you aren't interested in reading an article like that. That is, of course, unless you need a sleep-aid.

I want to focus on two provisions in the bill that could negatively impact you. In addition, I'll recommend actions you can take before December 31st to take advantage of tax breaks that are being reduced. Think of these as "use it or lose it" suggestions.

Let's get to it!

Mortgage Interest Deduction

Under current law, homeowners can deduct mortgage interest paid up to $1 million of mortgage debt. The original Senate bill retained the $1 million cap while the House bill lowered the deduction to $500,000. Capping the interest deduction to only $500,000 of mortgage debt would have negatively impacted homeowners in regions that have high-priced homes, such as Washington, D.C., New York, and California.

A compromise was reached on the final tax bill: It appears the deduction will be limited to the first $750,000 of mortgage debt.

Solution: If you have mortgage debt greater than $750,000 and less than $1 million, you should make your January 2018 mortgage payment before December 31st of this year. The interest paid will be allocated to your 2017 payments. You'll receive Form 1098 from your lender in early 2018. Check it to ensure the extra interest was captured in 2017. Unfortunately, only one extra payment is allowed. Any extra payments will have the interest allocated to 2018.

State and Local Tax Deductions

Currently, homeowners can deduct the full amount of property taxes paid. Both the Senate and House tax bills will limit the deduction to $10,000.

Solution: You can prepay some or all of your 2018 property taxes and the IRS will allow you to deduct that amount on the current year's taxes. If you decide to do this, I recommend contacting your local tax authority to ensure they credit your payment for 2017.

Listening / Playing / Reading / Watching

Here's what has my attention right now:

  • Persepolis Rising by James S.A. Corey. This is the seventh book in the seriously great Expanse series. If you're into science fiction and want a good space opera, I highly recommend starting with book one, Leviathan Wakes. Think of the Expanse series as Game of Thrones in space.

A Taxing Problem

In case you haven't been paying attention, the topic of taxes has been in the news a lot recently. One reason for the interest in taxes revolves around the following question:

Can you learn anything by studying someone's tax return? (Spoiler: You can)

He Who Shall Not Be Named once said, "There's nothing to learn from them". I disagree, but this post isn't meant to start a debate about whether or not candidates for president should be required to release their tax returns. With that in mind, let's explore what we can learn by reviewing someone's 1040:

  • Income, and sources. W-2 wages, self-employment earnings, investment income, alimony, retirement income, rental income, business dividends, annuities, bank interest, tax refunds, capital gains, unemployment, Social Security benefits, on and on. That's a long list!
    • A good planner can use this information to derive more information – lots of bank interest means lots of cash on hand, maybe not enough, maybe too much? Lots of capital gains might mean a tax-inefficient portfolio structure. So could lots of ordinary vs. qualified dividends or taxable bond interest vs. municipal interest. Big tax refunds might mean poor planning of estimates throughout the year.
  • Participation in a retirement plan. Here you can find out just how much someone saved for retirement during the year.
  • Participation in a Health Savings Account. This lets us know they participate in a high-deductible health plan.
  • Self-employment taxes. This tells us the structure of self-employment income vs. business entity income.
  • Deductible or non-deductible IRA contributions and eligibility, Roth IRA contributions and eligibility.
  • Payment/deduction of tuition and fees. This tells us if the client might be supporting a student (or putting themselves through school!).
  • Itemized deductions tell us many things, such as:
    • How much mortgage the client is carrying, or, if we know that, if the rate is competitive.
    • If there have been large medical expenses in the past year, which might be a key planning topic.
    • Payment of state/local income, sales and property taxes.
    • Charitable giving, leading to lots of planning topics surrounding effective giving.
    • Payment of absurdly high investment management fees (can’t help myself).
  • Eligibility and receipt of child tax credits, child care tax credits, tuition credits, etc, etc.

I could go on, but I won't. Sorry, I know you were hoping for a longer post about taxes, but I'll save that for a future post.

The takeaway is that financial planners - or anyone - can learn a lot by looking at a tax return.

I can't take full credit for this week's post. I had planned to write about this topic but a colleague of mine, James Osborn of Bason Asset Management in Colorado, beat me to it.

Listening / Reading / Watching

Here's what's got my attention this week:

  • How the Education Gap is Tearing Politics Apart by David Runciman, writing for The Guardian. This is an interesting piece focusing on education (or lack of) and its effect on politics.
  • Revolution Radio by Green Day. Okay, so this isn't at all related to personal finance. Green Day's albums have been in constant rotation at our house since Monday's amazing concert at the 9:30 Club. They just happened to release a new album today and I've had it on repeat since I woke up.