We wanted to share this article recently published in the Wall Street Journal that answers some important questions you might have about the new tax overhaul and how it could affect you.  As always, if you have any questions or wish to discuss this information further, please do not hesitate to contact us here at Anson. 

The Answers to Your Best Tax Questions

Wall Street Journal readers are bombarding tax reporters and their own advisers with questions about the overhaul that Congress has passed and President Donald Trump has signed. Most provisions take effect Jan. 1—giving you little time to act.

By Laura Saunders
Published Dec. 27, 2017 at 5:30 a.m. ET

Mortgage-interest deduction

I heard that interest will be deductible on mortgages only up to $750,000. Is this true? What about refinancings?

The new law allows taxpayers with existing mortgages to continue to deduct interest on a total of $1 million of debt for a first and second home.

For new buyers, the $1 million limit is now $750,000 for a first and second home.

This means that if Jane already has a $750,000 mortgage on a first home and a mortgage of $200,000 on a second one, she can continue to deduct the interest on both.

What if she already has one home with a $750,000 mortgage and wants to buy a second one next year and get a mortgage of $200,000? In this case, she couldn’t deduct the interest on the second loan, according to a spokesman for the National Association of Realtors, or NAR.

As to refinancings: The NAR says it believes homeowners can refinance mortgage debt existing on Dec. 14, 2017, up to $1 million and deduct the interest. But the new loan can’t exceed the amount of the mortgage being refinanced.

So if Ted has a $1 million mortgage he has paid down to $800,000, then he can refinance up to $800,000 of the debt and continue to deduct interest on it.

The law also suspends deductions for interest on home-equity loans through 2025.

Capital gains, dividends and FIFO

Does the new law change the taxes on capital gains and dividends? What about that “FIFO” change?

The new law doesn’t change the rates for this type of investment income, and the tax brackets change little from current levels.

The popular zero tax rate on long-term capital gains and many dividends will continue to exist. In 2018, the zero rate on this investment income will apply up to $77,200 of taxable income for married joint filers ($38,600 for singles). The 15% rate then takes effect up to $479,000 for joint filers ($425,800 for singles). The 20% rate applies above that.

Many readers also have asked whether Congress repealed the 3.8% surtax on net investment income. It didn’t. This levy kicks in at $250,000 of adjusted gross income for most married couples and $200,000 for most singles.

But lawmakers didn’t enact a provision for individual investors known as FIFO, for first-in, first-out. The FIFO change would have forced investors who are selling part of a holding in a taxable account—as opposed to a retirement account—to sell their oldest shares first.

Congress’s inaction means taxpayers can continue to minimize taxes by choosing among shares if they are selling part of a holding. For many investors, selling partial positions to lower their tax bills is a year-end ritual.

For example, say John owns Acme shares that now sell for $50 each. If he bought Acme shares at $30 and then again at $60, he would have a $10 loss in each share bought for $60 and a $20 gain in each share bought for $30.

If John has losses elsewhere in his portfolio, he could sell some of the $30 shares and use the gain on them to offset his losses. But if he has gains elsewhere, he could sell some $60 shares and use the losses to offset the gains.

Pass-through tax cut

I’m a psychotherapist who is a “sole proprietor” filing a Schedule C. Will I benefit from the tax cut for pass-through businesses?

You very well could, says Gil Charney, director of the Tax Institute at H&R Block.

The tax break is a deduction of 20% of business income earned by the owners of so-called pass-through businesses. These businesses flow income directly through to owners’ individual tax returns, where it is taxed at the owner’s rate. Pass-throughs include sole proprietorships as well as partnerships, limited liability companies and S corporations.

The tax cut “is a novel approach, and the lower rate will help millions of small-business owners,” Mr. Charney says. It will encourage many to expand, he adds.

There are limits to the new break. An important one is that the benefit phases out for single filers with taxable income above $157,500 and married joint filers earning more than $315,000 who are “service professionals”—such as doctors, lawyers, accountants, consultants and others.

The income limit also would be an issue if a lower-earning spouse with a pass-through firm is married to someone earning much more. This would be the case, for example, if a psychotherapist earning $80,000 is married to a corporate executive earning $400,000.

The tax cut for pass-through business is so new that it will take time to understand, but many sole proprietors stand to benefit from it.

State and local tax deductions

The new law limits state and local tax deductions (SALT) to $10,000 per return. I’m married, so if my spouse and I file separately, will we get two $10,000 deductions instead of just one?

Sorry, no. The SALT deduction for married couples filing separately is $5,000 each, for a total of $10,000 per couple—just as if you filed jointly.

Although married couples can file separate returns, the tax law doesn’t give them the same benefits as two separate filers. To get two $10,000 deductions, you’d have to get divorced.

There are steps to take ahead of the landmark change for 2018, which indeed will limit taxpayers to one $10,000 SALT deduction per return. The deduction can be a mix of property taxes and income or sales taxes.

The new law specifically bars deductions for payments earmarked for 2018 state income taxes, but tax specialists say it is still a good idea to pay balances due on 2017 income taxes before year-end.

The law doesn’t bar prepayments of property taxes. Some locales are making it easier to pay property-tax bills due in 2018 in order to get a 2017 deduction.

In general, says Crowe Horwath accountant David Lifson, the 2018 amount has to be billed in 2017 to be eligible for a 2017 deduction—but many locales do bill this way.

Another caveat is that taxpayers who owe alternative minimum tax, or AMT, for 2017 will lose some or all of the value of SALT deductions. For them, accelerating payments could provide a reduced deduction or none at all. Because the AMT is complex, it is hard to know the best moves without using a computer program.

Retiree taxes

I’m retired. How are the changes going to affect me?

One key change will be positive for many retirees.

The positive change is that the standard deduction is nearly doubling, to $12,000 for individuals and $24,000 for married joint filers. This is the amount taxpayers can deduct if they don’t list write-offs for state taxes, charitable donations and the like on Schedule A. Many retirees who have paid off their mortgages take the standard deduction.

Congress also decided to keep the “additional standard deduction” for people age 65 and over in the new law. It will be $1,600 for singles and $1,300 for each spouse in a married couple in 2018, which is what it was going to be for 2018 in the old law.

The personal exemption, which would be $4,150 in 2018, also is being repealed.

The bottom line: Say John and Margaret are a married couple, ages 67 and 65, with no children at home. Under the prior law for 2018, they would get a standard deduction of $13,000, additional deductions of $2,600, and personal exemptions totaling $8,300. Total: $23,900.

Under the new law, John and Margaret will get a standard deduction of $24,000 plus an additional standard deduction of $2,600, for a total of $26,600—or $2,700 more.

Provisions affecting retirees that aren’t changing include taxes on Social Security benefits and retirement-plan distributions.

There is also no change to individual retirement account, or IRA, charitable transfers, which allow retirees 70 ½ and older to donate IRA assets up to $100,000 directly to charities and have it count toward their required annual payout.

For IRA owners who want to give to charity, this is often a tax-efficient move. The taxpayer can take the standard deduction and still get a charitable tax break.

While there’s no deduction for this type of gift, neither does the IRA withdrawal raise the donor’s income. That can help reduce the 3.8% surtax on net investment income, Medicare premiums and even taxes on Social Security for some.

Alternative minimum tax

I read that Congress decided to keep the alternative minimum tax, or AMT, for individuals. Who will it affect?

Although Republican lawmakers vowed to end the AMT, in the end they retained it. It’s an unpredictable and complex parallel tax system that reduces or ends tax breaks allowed by the regular tax system.

Many details of the new AMT are still unknown. The good news for most current AMT payers is that it will affect far fewer people, says economist Joe Rosenberg of the Tax Policy Center, a nonprofit group in Washington.

Mr. Rosenberg estimates the new AMT will affect the filers of about 200,000 returns, while the current one affects about five million. Those paying the new AMT are also likely to earn much more than those who pay it currently, who tend to earn $200,000 to $600,000.

Several triggers of the current AMT—such as state and local tax deductions, personal exemptions and miscellaneous deductions—are being reduced or repealed. Mr. Rosenberg says the tax breaks that trigger the new AMT are likely to be more unusual items, such as incentive stock options, interest from certain municipal bonds and net operating losses.

Charitable donations

I gave $5,000 to charity last year, which I deducted on my return. If I give that much in 2018, will I get a tax benefit for deducting it?

Maybe not. Next year, the standard deduction nearly doubles, to $12,000 for single filers and $24,000 for married couples filing jointly. This is the amount taxpayers get if they don’t list write-offs for mortgage interest, charitable donations and the like on Schedule A.

As a result, next year a filer’s total itemized deductions—up to $10,000 of state and local taxes, plus charitable donations, mortgage interest, eligible medical expenses and other items—will need to exceed the new standard deduction amounts in order to get a benefit from listing donations on Schedule A.

Here are two examples. Say Susan and her husband, Bill, give $5,000 to charity in 2018, but their mortgage is paid off and they don’t have other itemized deductions except $10,000 of state taxes. Their total itemized deductions are $15,000, which is far below the new $24,000 standard deduction. So it doesn’t make sense to break them out.

Linda, a single taxpayer, is in the same situation—$5,000 to charity and $10,000 of state and local taxes, but no other write-offs. She could get a tax benefit from her donations next year, because her $15,000 total exceeds her $12,000 standard deduction.

For givers who want a benefit from Uncle Sam, there are ways to cope with this new limit. One is to “bunch” deductions every few years in order to surmount the higher hurdle for a charitable deduction.

Givers also should consider so-called donor-advised funds. These popular accounts enable donors to bunch smaller gifts into one large amount and take a deduction in the year of the gift. The donor can then designate charitable recipients later, and meanwhile the assets can be invested and grow tax-free.

Donors who have IRAs and are 70½ or older have another good strategy. They can contribute up to $100,000 of IRA assets directly to one or more charities and have it count toward their annual required distributions from the IRA. For more on this option, see “Retiree taxes” in this article.

Medical expenses deduction

Is the medical expense deduction changing? We spend $13,000 a month on care for my husband, who is in a nursing home, and the tax deduction helps us to afford it.

In the end, Congress decided not to repeal the deduction for medical expenses proposed by Republicans in the House of Representatives. As a public outcry made clear, many people are in this position.

This deduction has a high hurdle, so many taxpayers who can take it have very large unreimbursed medical expenses, such as for nursing homes or custodial care at home. Insurance premiums paid with after-tax dollars help others clear the hurdle.

The new law has a slight expansion, says H&R Block’s Mr. Charney. It allows taxpayers take a deduction for 2017 and 2018 if medical expenses exceed 7.5% of income rather than 10% of income.

Investment advisory fees

I’ve heard I won’t be able to deduct investment advisory fees next year. Can I prepay them?

Probably not, says Tim Steffen, a tax specialist with Robert W. Baird & Co.

The new law repeals Miscellaneous Deductions on Schedule A. This is a grab bag of write-offs for everything from uniforms to professional dues to unreimbursed employee expenses for entertainment to investment advisory fees.

This deduction has a high hurdle: Taxpayers can’t use it until eligible expenses exceed 2% of adjusted gross income. And if they are subject to the alternative minimum tax, this deduction isn’t allowed.

Deductible investment advisory fees typically don’t include mutual-fund expenses or commissions. Instead, these are the quarterly fees that advisers charge based on the total value of an account. They also could include annual account fees, such as for IRAs.

Fees for 2017 should be paid before year-end if possible, Mr. Steffen says. But they probably can’t be prepaid for next year because they can’t be determined ahead of time.

Investors also should consider paying future charges on traditional IRAs using assets inside the account. There won’t be a tax deduction, “but at least you are paying with pretax dollars,” Mr. Steffen says. But don’t pay fees for taxable accounts with IRA assets, as that could be considered a taxable withdrawal from the IRA.

Correction: The 20% capital-gains tax rate takes effect at $425,800 for single filers. An earlier version of the story said this rate takes effect at $239,500 for single filers.

Photo: Chip Somodevilla/Getty Images

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