Update on the Tax Cuts and Jobs Act (TCJA)
The Tax Cuts and Jobs Act (TCJA) was passed by Congress in a hurry late last year, and the IRS ans tax preparers have been working to digest some of the more thorny issues created by the tax overhaul. Here are the latest answers to some of the most commun questions:
1. Is home equity interest still deductible?
The short answer is: Not unless you’ve used the money to buy, build or substantially improve your home.
Before the TCJA, homeowners were able to take out a home equity loan and spend it on things other than their residence, such as to pay off credit card debt or to finance large consumer purchases. Under the old tax code, they could deduct interest on up to $100,000 of such home equity debt.
The TCJA effectively writes the concept of home equity indebtedness out of the tax code. Now you can only deduct interest on « acquisition indebtedness », meaning a loan secured by a qualified residence that is used to buy, build or substantially improve it. If you have taken out a home equity loan before 2018 and used it for any other purpose, interest on it is no longer deductible.
2. I’m a small business owner. How do I use the new 20 percent qualified business expense deduction?
Short answer: It’s complicated and you should get help.
Certain small business structured as sole proprietors, S corporations and partnerships can deduct up to 20 percent of their qualified business income. But that percentage can be reduced after your taxable income reaches $157,500 (or $315,000 as a married couple filing jointly).
The amount of the reduction depends partly on the amount of wages paid and property acquired by your business during the year. Another complicating factor is that certain service industries including health, law, consulting, athletics, financial services and accounting are treated slightly differently.
The IRS is expected to issue more clarification on how these rules are applied, such as when your business is a mix of one of those service industries and some other kind of business.