We all know that the House tax reform proposals won't go through as proposed. While the concept of simplifying the tax code is admirable, simple is not easy. When you throw in a good dose of politics because people hate having things stripped from them, well simple is virtually impossible.
Some of the proposals might benefit you and some won't, so let's not concern ourselves with that. But there are some important things that you might consider doing before year-end regardless of what the final package looks like. I am going to mix in some technical with the practical, so bear with me.
If you itemize your deductions, and this is really important — the standard deduction is almost certainly going up and what you get to deduct is almost certainly going to fall. In 2017, the standard deduction is $12,700 for joint filers and half that for single filers. The most common deductions you add up are all of your state and local income taxes, property taxes, mortgage interest, health care costs and miscellaneous expenses which may be limited, and charity. The important thing to realize is that you get to take the standard deduction no matter what. In other words you only benefit from the deductions above the standard deduction levels.
This is really important because if the standard deduction almost doubles, many people won't itemize deductions any more. Remember when you were told having a mortgage provides great tax savings? Only if you itemize. It's great having the government subsidize our charitable gifts, but they really only do so if we itemize.
The proposal calls for a cap on first home mortgage interest of $500,000, but existing mortgages are grandfathered. It also eliminates the deduction completely for second homes, so that cabin just became more expensive. And you can't simply move that cabin loan to your main home because of complicated rules regarding acquisition indebtedness. But more importantly, if your standard deduction is doubled, you might be better putting more down on the house (or even renting). You need to compare your mortgage cost to what you may get from other investments.
The new tax proposal is trying to eliminate many deductions (but the fight over which ones that really go will be more exciting than the Thrilla in Manila). One of the reasons many of us Minnesotans get to itemize our deductions is because of our state and local income taxes and property taxes. The new proposal does away with the income tax deductions and limits the property tax deduction. While it is not clear whether the income tax deductions will actually be eliminated — there are still some Republican members of Congress feeling pressure in the high-tax blue states — if you are not in an alternative minimum tax situation, make sure you send in all of your Minnesota tax payments in 2017. This is useful for two reasons — the deduction may go away and/or you may be in a lower tax bracket next year as the number of brackets is reduced.
This may also be a good year to double up on your charitable gifts. Any dollar you get to itemize this year represents a tax savings that could get lost if you don't itemize next year. On the other hand, if you will be well above the itemized deduction limits, it may be better to wait to gift to charity until next year, when some of the caps and phase-outs go away.
I will be surprised if the health care deduction is actually eliminated as proposed, but if you are in a situation where you are close to that 10 percent level, you should consider incurring your health care expenses this year rather than next.
