Should your financial strategy change with the tax law?

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Should your financial strategy change with the tax law?

We’ve now come through another April tax deadline and hopefully taxpayers and accountants have recovered. No one must point out that this year (and the years to come) will be especially challenging as we, and Congress, continue to learn more about the new tax laws.

While I am not an accountant, this topic is of special interest to me because of the impact it has on business owners and families. This is going to be an ongoing topic for us this year, especially as we determine how this is going to impact our longer-term financial plans.

If you’ve read my previous blog, you may recall that I love enchiladas. While I hate to tie enchiladas and taxes into the same topic, there are many layers to both so it’s somewhat fitting. And, I’ll also add a little on to the famous saying, “only two things are certain: death and taxes”. In the Croff household, we add a third certainty: enchiladas!

Well, enough about us, let’s move on to the topic at hand. I’ll start by reviewing some of the major changes and then discuss what this may mean to your current financial strategy.

Real Estate:

So, what about Real Estate? How is the new tax law going to affect my home?

It’s really only an issue for homeowners who have a mortgage for more than $750,000. Now you can deduct interest on up to $750,000 of mortgage debt down from $1 million

The $1 million is grandfathered in so older loans won’t be affected. Thanks grandpa.

Interest on 2nd homes will still be deductible but the $750K limit covers both primary and vacation homes.

Another provision to watch out for is the home equity provision. Interest on these loans are no longer deductible unless the funds are used to improve your home. This applies to both new and existing home equity debt.

What does this potentially mean for how I structure debt? The biggest item is that in many cases, home equity lines (HELOC’s) are still less expensive than personal loans and credit cards so let’s not discount them all together.

Property Taxes:

The cost of owning a home may have just gone up for you.

The new law caps the amount you can deduct in state income and property taxes at $10,000.

This will NOT affect you if you claim the standard deduction, which we covered in our earlier blog, or if you have a combined tax bill that is less than $10,000

Capital Gains:

Capital Gains. What can we say about capital gains. Our beloved preferred method of paying taxes. Surely this has not changed.

Weeellll,

The law is changing HOW the capital gains are being determined.

In the past it was based on your tax bracket. Those in the 10 % and 15% paid 0 (nada, zippo) in capital gains. Those in the top tax bracket paid 20%.

NOW, the rate will be based on income thresholds.

Taxable income of less than $38,600 for an individual and $77,200 on joint returns equals a 0% capital gains rate.

Taxable income above that threshold but less than $425,800 single or $479,000 married will pay 15%.

And higher incomes will pay 20%.

So, income planning will be a must do in the future.

What does this mean for financial planning?

The bottom line is this: finances and the tax laws are forever changing and getting more and more complex.  The strategies for dealing with these challenges are evolving as well.

Business owners face challenges on multiple fronts. Many of my clients tell me that business is good but they are having trouble finding people. The labor pool is tight. Your competitors are probably trying to poach your key employees right now. How do you combat that? More money and benefits? Everyone else is doing the same. We have some unique strategies that help tie these key people to your organization and reward them for their loyalty.

 

Man, once again my enchiladas are cold. I don’t know what it is that makes we want to write every time we have them for dinner. I guess maybe I’ve found my muse.