Tax Law Changes You Haven’t Heard

The Wealthy Accountant is giving over $1,000 in cash away to subscribers. Don't miss out! Subscribe today. Check the Where Am I page for drawing dates.

Plenty has been written about the recent tax bill. Most news reports repeat the same information. I want to expand on what is widely known to include some lesser opportunities to reduce taxes and pitfalls most people (and many tax professionals) are unaware of.

This post will cover a wide variety of tax issues that are changing. It will repeat a few facts published here and here previously.

On January 12th I’m attending an update course on the tax bill. If I learn something new worth publishing I’ll write one more broad post on the tax bill.

Regardless, once these preliminary posts are out I will start working on more targeted tax topics the tax bill opened. A post I’m eager to write involves the issues surrounding the new business income deduction. The IRS will have to create a worksheet to cover all the issues in the tax bill designed to prevent people from gaming the system. I’ll attempt to create the worksheet before the IRS does and provide options FOR gaming the new tax laws. There will be plenty of opportunities for those who plan and plenty of risks for those who don’t dig deep enough into the Code to organize their tax matters optimally.

Finally, before we start, I’m leaning heavily on The Kiplinger Tax Letter (not an affiliate link) for this post. The words are mine, but Kiplinger is providing the mental tickler helping me decide what to include here and the order. The words are all mine with exception of what is lifted from the tax bill. Some things are hard to say in a new and unique way so I’ll parrot what you’ve read multiple times on other news outlets. I promise to add some of my patented secret sauce to keep it as fun as new tax law discussions can be.

Remember the tax rules for 2017. If a future Congress doesn’t address the temporary nature of the individual changes we go back to 2017 rules after 2025.




Standard deduction: For 2018: $24,000 joint returns; $18,000 for head of household; $12,000 for singles. Taxpayers age 65 and over and/or blind get $1,250 extra per person on a joint return; $1,550 for others. (Yes, married people get less than singles when they reach 65 or are blind.)

Personal exemptions: Gone. As if you haven’t heard that often enough.

Mortgage interest: Pay special attention here. There are several issues to consider.

In the past you could deduct interest on up to $1 million of new acquisition debt on your primary residence or second home. This has been reduced to $750,000.

However! the new rule usually applies to NEW mortgage debt entered into AFTER December 14, 2017.

Old loans use the old rules!!!

ALL home equity loan interest is NOT deductible after 2017. HELOCs have no tax advantages this year.

Pass the SALT: State and local tax deductions are capped at $10,000 annually for 2018 and after. You can use the full $10,000 limit on any combination of residential property taxes, income taxes or sales taxes.

Property taxes ARE FULLY deductible for income property reported on Schedule E. The same applies for mortgage interest, subject to the passive activity rules and at-risk limitations.

Moving expenses: Gone, except for military.

Unreimbursed employee business expenses, IRA fees, brokerage fees, tax prep fees, safe deposit box fees: Gone!

Theft losses: Generally, gone.

Casualty losses: Personal losses are gone unless in a presidentially declared disaster area.

Alimony: Pay special attention to the dates here. POST-2018 divorce decrees with alimony are NOT deductible to the payer and NOT included in income for the recipient. The old rules still apply for prior divorces and those finalized in 2018 or earlier.

The good news isn’t all good for the recipient. Alimony isn’t taxable for post-2018 divorces, but alimony was considered earned income in certain instances prior. An alimony recipient can’t fund an IRA with post-2018 divorce alimony payments unless she has other earned income. This may sound mute, but consider the planning strategy of regular Roth IRA contributions with the intent of passing the account to beneficiaries after death. It’s an uncommon issue that still needs airing.




Charitable deductions: Itemizing has been pared back significantly due to the higher standard deduction. While many people will have fewer tax advantages contributing to a non-profit in the future, those who donate a large percentage of their income have an added tax break.

The old rule allowed a deduction for up to 50% of AGI for cash donations in any one year. That limit is now increased to 60%. Most people will not have an issue with this, but taxpayers funding a donor advised fund, NIMCRUT or similar philanthropic vehicle will potentially benefit. Unused charitable deductions are carried forward for up to five years.

Hobby expenses: Gone! This is huge for anyone with an income producing hobby. It may hasten your decision to conduct your affairs as a business.

Medical deductions: The old rule is back. Medical expenses are deductible once you surpass the 7.5% AGI threshold if you itemize. Unfortunately, the break only lasts for 2017 and 2018. Then it’s back to the 10% of AGI threshold.

Tax brackets: We keep seven brackets, but with lower rates. It also takes longer to get to the higher brackets. Those on the edge of creeping into a higher bracket benefit the most from the higher income required to trip into the higher bracket.

Inflation indexing: We’ve talked about this before. The chained-CPI will be used for taxes which reports lower inflation. Over time this will bite every taxpayer hard.

LTCG: Long-term capital gains are the same as before with a notable exception. The break point where a higher LTCG rate applies is different from the actual tax brackets. You can thank the tax profession lobby for this added bit of complication. Actually, my peers had nothing to do with it, but it stands a good chance of lining our pockets nicely over the next years.

The net investment income tax of 3.8% survives. Lucky us. (Once again, always nice to see extra complexity as a form of job security for the guys with pocket protectors.)

AMT: The alternative minimum tax lives, albeit with a reduced influence. The AMT exemptions are higher: $109,400 for joint filers and $70,300 for the rest of the crowd.

The exemption phaseout begins at $1 million for joint filers and $500,000 for others now.

Health insurance mandate: Stop the high-fives! The mandate still applies to 2018! The mandate is gone afterwards.

Child tax credit: People are only hearing part of this story, too. The child tax credit is increased to $2,000, but ONLY $1,400 is refundable. It will make a difference for some low income filers.

A new non-refundable $500 credit now exists for 2018 and after for a non-qualifying child: elderly parent and disabled child are two examples.

Estate tax: The annual gift tax exclusion is $15,000 per donor to each donee in 2018. (A married couple can give $30,000 to each of their children if structured properly.) The lifetime estate and gift tax exclusion was raised to $11.2 million for 2018.

Step-up in basis for heirs is unchanged.

Note on trust or estate tax brackets: Trusts and estates hit the top tax bracket (37%) at $12,500. This is important for more than just trusts and estates now as you’ll see in a moment.

Kiddie tax: In the past the kiddie tax was based on the parents’ marginal tax rate. This caused plenty of problems over the years for a variety of reasons we’ll avoid discussing today. Starting in 2018 the kiddie tax for unearned income and capital gains is calculated using the estate and trust rates for children under 18. There were a lot of old rules which changed several times over the years. The kiddie tax should be easier to figure because it’s calculated without regard to the parents’ tax information.

Retirement accounts: There was a lot of angst as Congress debated significant changes to retirement plan funding. The angst was for naught. The only notable change is the loss of the ability to undo a traditional IRA to Roth conversion.




ABLE savings accounts: In certain circumstances you can rollover from a 529 plan into an ABLE account tax-free. Payins are also eligible for the saver’s credit if made by the beneficiary over the $15,000 annual limit.

529 plans: Starting in 2018 you can now take up to $10,000 in annual distributions from a 529 plan for elementary and secondary education. This includes religious schools.

Corporate tax rates: Dropped from a top rate of 35% to a flat 21%. As one reader commented recently, this could be a tax increase from very small regular corporations. Business owners need to consult with their tax professional.

Regular corporation AMT: The alternative minimum tax for regular corporations is gone.

Business income deduction: I will be writing extensively on this topic in the near future. There are many issues to consider I want to fully flesh out.

Note: investors in REITs and partners in publically traded partnerships qualify for the deduction. Therefore, not only do business owners need to consider the new deduction, some investors do, too.

Business losses: People are not paying attention to the cap now on business losses! Joint returns are allowed up to $500,000 in business losses; all others $250,000. Any remaining loss is non-deductible in the current year and is carried to the next.

Bonus depreciation: 100% bonus depreciation is available for many assets placed in service after September 27, 2017 and until the end of 2022. Bonus depreciation phases out over fives after 2022. Passenger autos also get higher limits.

Business interest: The business debt interest deduction is capped at 30% of adjusted taxable income. The new rule only applies to businesses with over $25 million in gross receipts. Some companies are exempt.

I bring this up because I want to see how well this works as interest rates climb. It might play into investment decisions down the road. Also, higher interest rates could affect certain firms more than others due to their debt load. Thinks Tesla and similarly leveraged companies.

Other business deductions:

Business entertainment: Gone!

Country club dues: Gone!

The 9% domestic production deduction: Gone! Not that I’ll miss it. I always felt it was a pain in the tail feathers to deal with.

NOLs: Net operating losses can only offset 80% of taxable income now and usually must be carried forward only. (Many states didn’t have NOL carryback rules anyway; it was carryforward only.)




Like-Kind exchanges: Are for real property only now as long as it isn’t held primarily for sale.

Transportation deductions: Most employer provided transportation benefits are no longer deductible by the employer. Biking is specifically excluded!

Paid family leave: I’m not hearing much about this new credit and I think it’s because it only applies to the 2018 and 2019 tax years. The credit is 12.5% of paid medical or family leave wages; more if the paid leave is greater than 50% of regular wage. Consult your tax professional if planning to use this credit. The rules are extensive.

Tax on College! Private colleges with over 500 students and over $500,000 per student in “non-education-related assets” are assessed a 1.4% excise tax per year!

In the United States we spend more on prisons than education, and if you haven’t noticed, we are getting exactly what we’re paying for. I suggest we add a new tax on prisons and jails and watch how fast the crime rate drops in these parts.

It’s all, about the incentives, dear readers; all about the incentives.



Keith Taxguy

29 Comments

  1. Jason@WinningPersonalFinance on January 5, 2018 at 9:40 am

    In the high tax states, the value of renting has certainly shot up when compared to buying. I’m trying to figure out if there is a tax hack by swapping houses with a neighbor and renting them back from each other. This would make each of our property taxes fully deductible when only a small portion would be deducted based on the new rules. It’s probably not very practical but may prove my point about the advantages of renting over owning. What do you think?

    • Keith Schroeder on January 5, 2018 at 9:44 am

      I think you’ll see a lot of that kind of activity, Jason. Not only that, but 20% of the rental profits will probably qualify for the business income deduction.

      The tax bill tries to stop certain types of gaming the system. What you propose between family members probably doesn’t work. But with an unrelated neighbor? I think you’re onto something and the tax benefits extend beyond the full deductibility of property taxes.

      • JD@WealthNotRetirement on January 5, 2018 at 11:43 am

        Jason, that is a pretty smart observation/idea.

        Keith, what are your thoughts on a flat tax? This kind of gaming of the tax system is exactly why a flat tax above a certain wage is the only fair option. The system can always be legally gamed in some way if you look hard enough. (Note, I’m not against gaming the system — it’s smart).

        • Keith Schroeder on January 5, 2018 at 12:06 pm

          JD, the options to game a flat tax are lower, but still exist. We have a flat tax called sales tax in most states. We also had close to a flat tax from 81 – 87 when we had two tax brackets: 15% and 28%. To answer your question, a flat tax wouldn’t bother me. Savers still kill it under a flat tax system.

  2. JOHN MARINO on January 5, 2018 at 9:42 am

    Keith – I think the annual gift tax exclusion is $15,000 per donor, not donee.

    • Keith Schroeder on January 5, 2018 at 9:49 am

      I think you’re right, John. I double checked and Kiplinger has it wrong. It happens in taxes with all the moving parts. Kiplinger will probably correct the error next issues. I, on the other hand, will correct it right now.

  3. Tony on January 5, 2018 at 9:45 am

    1.4% tax on “non-education related assets”… I think I actually like this, but it seems you’re attitude towards it is negative. Maybe I’m misunderstanding, but to me, that means private schools would benefit from putting more of their assets towards educational-related assets instead of say… sports complexes…. How is this a bad thing?

    • Keith Schroeder on January 5, 2018 at 9:56 am

      As I read the bill, Tony, it seems the excise tax on private schools is exclusively levied against their endowment fund.

      My attitude on this new tax is neutral. I wanted to end with something mildly funny and that’s as close as the Tax Code allowed me to approach.

  4. Tax Law Changes You Haven’t Heard – Talking FI on January 5, 2018 at 9:47 am

    […] to include some lesser opportunities to reduce taxes and pitfalls most people (and many tax… Tax Law Changes You Haven’t Heard Source: Wealthy […]

  5. Scott Berman on January 5, 2018 at 10:08 am

    I read somewhere (although I can’t find it now) that the interest on a HELOC taken out on a primary residence will still be deductible IF that money is used to acquire an investment property. I also wonder if interest on a HELOC taken out on an investment property would still be deductible.

    • Keith Schroeder on January 5, 2018 at 10:14 am

      You found the exception to the rule, Scott. However, the HELOC interest is investment interest deducted on Schedule E with the income property. All interest expense related to the income property is deductible regardless the source.

      • Ian Barret on January 5, 2018 at 11:52 am

        I’ve been curious about this. The ‘tip’ at the center bottom on page 11 of IRS Pub 535 implied home equity debt isn’t necessarily traced to how the proceeds were used. Pub 936 (particularly pp 2, 4, 10-11) adds more doubt, as does its table for figuring home equity debt limit for pre-2018 tax years. I know, I’m not supposed to put too much weight into IRS Pubs, but have I been misinterpreting something? Is all HELOC or home equity loan interest deductible on Sch E if all loan proceeds were spent on the investment?

        Also, thanks for the well-organized article. It was more detailed than any other broad assessments of the tax law I’ve seen. Best wishes for a Happy New Year to you and your family!

        • Keith Schroeder on January 5, 2018 at 12:19 pm

          You have to trace the exact amount (not easy if you commingle personal and investment property debt) to find the amount deductible on Schedule E or elsewhere. I rarely use IRS pubs because the IRS isn’t a tax authority and if you cite an IRS pub in Tax Court you automatically lose. (Yes, the IRS is quick to point out to the judge they are bill collectors, not tax professionals when it serves their purposes.)

          To answer your question, if you use an equity line on your personal residence to fund a rental purchase I’ll put the deduction on Schedule E. The IRS is unlikely to disallow the deduction in an audit and if they do I’ll see them in Tax Court. The odds favor me.

          The reason why this isn’t that big an issue is because the banks know how to structure these loans. Example: You buy a $100,000 income property and want to use the equity in your residence to fund the down payment. The bank will write the entire mortgage for the investment property and attach the residence as collateral. Problem solved And it’s easier. (There is some additional risk for you and added safety for the bank when this is done. With an equity loan you still are on the hook for the loan or you could lose your house. However, if you stop paying the rental mortgage, but keep the home equity loan current, the family home is still protected. Not so when the residence is attached to the note. I recommend refinancing when there is enough equity to protect your primary residence from problems with the income property.)

          • Ian Barret on January 5, 2018 at 2:19 pm

            Thank you kindly for your detailed reply. I’ll be sure to point/link others to it when appropriate.
            In my own case an equity loan (secured by a duplex that is 50/50 primary res/rental) purchased another duplex outright, so there was technically no origination debt, (though all of your third paragraph makes good sense.) With my unorthodox arrangement I’ve always been second guessing the proper interest treatment. I wish I could find an accountant of your caliber locally 🙂

            <>



      • Mike L Weber on January 12, 2018 at 6:33 am

        I use several lines of credit, including a HELOC, to make loans to house flippers. I also trade stock on margin which I deduct as investment interest expense on Schedue A. I’ve been deducting the HELOC as mortgage interest in the past because they let me, but in the future I guess I’ll just move it to Sch A Investment Interest with the other LOC interest and margin interest.

        Thanks for the excellent article!

        • Keith Schroeder on January 12, 2018 at 7:23 am

          There are limits on the deductibility of investment interest on Schedule A, Mike. The expense should be matched with the activity on the tax return.

          • Mike L Weber on January 12, 2018 at 7:34 am

            At this point, the income is simply coming in as 1099 interest income in my name, so I would expect Schedule A to be the right place. Going forward, I am performing the lending in the name of an LLC (though the borrowing, when needed, is in my name and then becomes a capital contribution to the LLC.) I’m not sure exactly where everything goes when I get my first 1099 for the LLC (the LLC is NOT an S-Corp.)



  6. Dave on January 5, 2018 at 10:17 am

    So when business vehicles get traded in, it would be treated as a sale of old vehicle then depreciate total cost of new vehicle?

    • Keith Schroeder on January 5, 2018 at 10:23 am

      I’ve been thinking that all the while, Dave. I’ll write a deeper post on this when things are clearer. Maybe my Jan 12th class will have a better feel on this. Maybe we need to wait for the IRS to write regs. But it does feel this way.

      The reason why it matters is recapture of depreciation. Remember, depreciation above straight line in the first five years is taxed at a flat 25%. I don’t think that has changed. Once again, I’ll need a full post to flesh out the details as the clouds clear. At some point I’ll take a stand regardless what IRS does.

  7. MB on January 5, 2018 at 10:20 am

    Thank you Keith! Great article.

  8. Stop Ironing Shirts on January 5, 2018 at 11:38 am

    Great article Keith. They certainly didn’t achieve any simplicity in the tax code, especially with a lot of the manuvering around business taxes.

    It’ll be interesting what some companies end up reporting as an effective tax rate. I work in finance and plenty of our business development activities (client entertainment, meals, travel) are real and necessary expenses to the company, but will increase the overall effective tax rate since they’re not deductible expenses.

    As a banker it also means taxable business income won’t be as correction on actual cash flow and it’ll keep our underwriters and analysts gainfully employed.

    • Keith Schroeder on January 5, 2018 at 12:23 pm

      Shirts, I’ll report in detail once I have greater clarification or come to a conclusion from my research. I don’t think all “entertainment” as we traditionally think of it is nixed. I could be wrong. Stay tuned.

      BTW, this tax bill also keeps crazy bloggers busy, too, not just tax pros and bankers.

  9. Josh on January 5, 2018 at 7:39 pm

    Keith, do you have any insight into how the pass-thru deduction will affect REIT’s in a taxable account? I am assuming that 1099 div forms will have a new field for pass-thru income that reflects the adjusted amount subject to tax? Back of the envelope, and it appears as though REIT dividends will be taxed at around 17.5% for the new 22% bracket, which narrows the spread between qualified dividends to 2.5%.

  10. John McCarthy on January 7, 2018 at 8:59 pm

    This is the most interesting part I am anxiously awaiting more guidance on. This has a huge potential impact on our standard S Crop tax planning. Would be happy to hear your take on it. Of course until we have Treasury Regs we are in the dark… https://www.forbes.com/sites/anthonynitti/2018/01/04/the-new-qualified-business-income-deduction-varies-based-on-your-business-type-or-does-it/#302361922076

    • Keith Schroeder on January 7, 2018 at 9:09 pm

      Not completely in the dark, John. Experienced tax professionals have a good idea where this is going. The IRS watches the accounting community to see how they interpret the the rules and frequently use something close to the consensus.

      I will delve into this topic frequently over the year. The real question is: Do you go to a regular corp (c-corp) or stay an S?

      I also disagree with the calculations in the Forbes article! The author assumes reasonable compensation to owners and guaranteed payments to partners is wages in calculating the business income deduction. The Tax Cut and Jobs Act specifically states these are not included when using wages in the formula for businesses over the threshold.

      Stay tuned for my answers. And I do read the same tax articles floating around the business journals too, to get an idea where this will land.

      • John McCarthy on January 8, 2018 at 4:26 pm

        Keith, Bob Jennings at Tax Speaker seems to be indicating that the IRS will require a Reasonable Wage for Sole Props under Code Sec. 199A(c)(4)(A). Is this your view on where things are going as well? If you can share any additional articles on this topic I would love to read them. Thanks!

        I would agree on the point of taxpayer compensation not being included in the wage limitation test under my reading of Code Sec. 199A(b)(4) and it’s reference to Code Sec. 199A(c)(4)(A).

        • Keith Schroeder on January 8, 2018 at 4:40 pm

          I agree with Bob Jennings, John. I’m going to get a post out on this in the next week or two because there are so many issues.

          A Forbes article mentions the “reasonable compensation” could bring a taxpayer below the phaseout and allow the business income deduction without employees. I think that will work. However, over the phaseout level guaranteed payments and reasonable compensation will not count toward payroll available for the deduction calculation. (Clear as mud? I’ll write about it later.)

          I’m curious where the IRS will go with this. There was talk a while back for 70% of sole prop profits to be deemed owner’s wages and the remaining 30% going toward calculating the deduction. I need to review that part of the bill again before writing the post.

  11. Casual Reader on January 9, 2018 at 4:43 pm

    Bonus Depreciation is for assets post 9/27/17, not 9/17/17 as your article states.

    • Keith Schroeder on January 9, 2018 at 10:55 pm

      Casual Reader, thank you pointing out the discrepancy. I’m not sure it was a typo or the night was getting too late. Readers should never be afraid to point out something they think is wrong. My ego isn’t that fragile.

Leave a Comment





%d bloggers like this: