How Will the 2018 Tax Law Changes Affect You?
2018 tax law are bringing pretty significant changes for most tax payers this year.
Last week I caught up with Bryan Schurter, and asked if we could chat about the 2018 tax law changes. Over the next few months, we’re all going to be faced with With tax changes across the board, we’re going to tackle the biggest benefits, and/or changes, and talk about how it affects you.
Here’s what we covered
- Introduction to Bryan Schurter
- 2018 Tax Law Changes – 2018 Tax Cuts and Jobs Act
- Tax Benefits for All
- Child Tax Credit Changes
- Mortgage Interest Changes
- SALT Caps
- HELOC and Second Mortgages
- Should I Hire a Professional?
- Working with a Professional
Introduction to Bryan Schurter
Scott Schang: I’m Scott Schang. I’m the branch manager of BuyWise Mortgage. We are a mortgage broker in California. We’re located here in Huntington Beach, California.
And if you haven’t watched our videos before, what I occasionally and like to do is I like to have conversations between professionals about things that typically you would need to pay for somebody services.
And I think one of the bigger challenge is, at least I know for myself as a consumer, I wonder when I’m talking to somebody, if they’re telling me what I want to hear in order to sell me something.
Scott Schang: So we like to have these conversations with other professionals and have these and just talk about things that I think are really, really important for consumers.
Give you a little insight into conversations that take place about this stuff when somebody is not trying to get into your pocket, which I’m not saying everybody’s trying to get into everybody’s pocket, but of course having as much information as you possibly can to make informed decisions on your own is very, very important.
Scott Schang: So today I have invited a friend of mine, a good friend of mine actually. I probably have to say that … I have to disclose that I do business with Brian. I do business with him as my tax preparer. And I’ve invited Brian on today to talk about the changes in the 2018 Tax Law changes.
So Brian, good morning. Thanks for coming out here and having this conversation with us.
Bryan Schurter: All right. Good morning, Scott. Glad to be here and thanks for inviting me. I appreciate it.
2018 Tax Law Changes – 2018 Tax Cuts and Jobs Act
Scott Schang: Absolutely. We’re coming up on tax time, there was a lot of hubbub in February when the new tax law changes came out. The actual name of the tax law changes , is 2018 jobs act and … do you know the actual legal name of it?
Bryan Schurter: The tax cuts and jobs act. Yes.
Scott Schang: Tax cuts and jobs act. I keep trying to think of that. So that’s the official act and I think that was approved in February of last year, right? Of 2018.
Bryan Schurter: It was actually signed into law in December of 2017. [crosstalk 00:02:23].
Scott Schang: Oh, okay. There you go.
Bryan Schurter: So signed to law on December 17. Most of the changes took effect in the beginning of 2018.
Scott Schang: And that’s where we’re not experts on.
Bryan Schurter: So all those changes, we’re not going to see until, well, I shouldn’t say all those changes. Most of the changes we’re not going to see until we do our tax returns this year. [crosstalk 00:02:42] tax years. [crosstalk 00:02:44] last year for 2017, the law wasn’t in effect yet.
So that’s why we’ll see those changes. They get started occurring at the beginning of last year, but we’ll probably really feel them when we do our taxes this year.
Tax Benefits for All
Scott Schang: Okay. Now, there is a lot to this. Brian and I are going to skim over some of the high level stuff. We’re going to focus a little bit on what tax changes are going to impact everybody.
And then we’re going to talk a little bit about how tax law changes impacts housing because that’s kind of the space that I’m in. I talk to a lot of homeowners and a lot of home buyers and so we’re going to do a high level, set your expectations on what you can expect for that.
And the ultimate thing we want you to take away from here is talk to somebody. Talk to a professional, if you have your own professional, talk to them, if you need introductions, talk to people that you respect.
But Brian, let’s go right out of the gates here and let’s talk about, there are some changes that apply … they could apply to almost everybody, right?
Bryan Schurter: There are some changes apply to most everybody. And like you said, you brought up a really good [crosstalk 00:03:53].
Scott Schang: When do you use it or not? But you could.
Bryan Schurter: And like you said, just to caveat everything with taxes, as with everything, there’s almost always an if, and, or buts. So everything that I’m going to say and everything we talked about, what you kind of mentioned is there’s always an if, and or but in your specific situation could and probably will be different.
But like you said, if we touch on the higher level things that are going to affect most people, I think that that’s going to be applicable to everybody. But yes, the big change that will affect everybody as the tax rates. So the tax rates have gone down.
They used to be 10, 15, 25, 28, 33 and above. And now they’re 10, 12, 22, 24, 32, 35 and 37 so the tax rates have gone down a couple of percent when each income tax bracket. So that will affect everybody as an individual.
Scott Schang: And that was every bracket, right?
Bryan Schurter: That’s every bracket. Yes.
Scott Schang: Okay. The other big thing was, it seemed like a lot of the news are around it. At least from the administration, this was an attempt to potentially allow people to have less paperwork.
Remember, it ended up being a little bit of a joke that, but you can do your taxes on this postcard kind of thing, but they did make a really important change for everybody. And that was the minimum standard deduction. Correct?
Bryan Schurter: Right. So the standard deduction, which affects a lot of people has almost doubled. So if you’re single in 2017 before 2017, the standard deduction was 63, $6,350, now it’s $12,000. For a married couple, it went from 12,700 to $24,000.
So it pretty much almost doubled the deduction that you can take off of your income. So what the standard deduction is as if is that’s a deduction directly off of your income. So the standard deduction is in lieu of itemizing, which I know we’re going to get to it a little bit.
Child Tax Credit Changes
Scott Schang: Yeah, it’s either/or. Right? So you either itemize, which yeah, we’ll dig into a little bit. Child tax credit is a big one that impacts everybody who has kids, right? Or kids within a certain age range.
Bryan Schurter: Right. So everybody has a kid under 17 years old will most likely be affected. Most everybody will be affected by this one in a very positive way. So the child tax credit used to be $1,000 per kid under the age of 17 years old. So once the child turns 17, there’s a lot changes that start to occur.
But while they’re under 17 years old, the previous law was $1,000 child tax credit. And that tax law changes, but it started going away once your income went above, I believe $110,000 is when it started being reduced and going away with that credit.
Bryan Schurter: So for a lot of people, that child tax credit could have been available, but their income made them lose a lot of that deduction. Today, and with the tax reform bill, it’s now $2,000 per kid and it doesn’t start going away for a married couple until they’re making $400,000.
So not only did it double, but now more likely more people are going to be able to take advantage of the child tax credit. But even though in the past they might’ve been able to, their income might have prevented them from getting the full benefit of the credit in the past.
Scott Schang: Okay. So now real quick, let’s hit on the difference between a deduction and a tax credit because we talked about minimum standard deduction. We used the word itemization and we’ve also touched on child tax credit. Real quick, what’s the difference between a deduction and a tax credit and how does that impact how we do in taxes.
Bryan Schurter: Okay, So a deduction is a deduction from your income. To keep numbers really simple, let’s say your taxable income is $100,000. If you have a deduction of $20,000, now you’re only going to be taxed on $80,000. So that $20,000 gets reduced from your income and you’re taxed on less income.
Scott Schang: So that’s like the minimum standard deduction, right? Well, you’re either itemizing or you’re taking the deduction, and both of those is you take what you earned and then you can reduce what you earned and then you calculate your income taxes off the lower amount when you [crosstalk 00:08:21] deductions.
Bryan Schurter: Correct. Correct. So it’s just lowering your income and you’re going to get taxed at a lower income.
Scott Schang: Okay. So now when I’ve calculated my tax, so we were at a hundred, now we’re at 80 safe for whatever reason, and now I pay taxes on that 80,000. So I have this chunk of taxes that I owe right? Say, let’s call it $10,000 or 20,000. I guess I had $100,000 is probably … say it’s $25,000 or more. Now I have this child tax credit that impacts that $25,000 that I owed directly. Correct?
Bryan Schurter: Right. So the difference to your credit, the deduction, there’s a deduction just lowers your income and you get paying taxes on a lesser income. A credit is now that we’ve done all the calculations and you owe, I think the number, you might do those $10,000.
Let’s say your total tax liability is $10,000. A credit will reduce that right off the top. So it’s a $2,000 child tax credit, it’s going to reduce that $10,000 tax liability to $8,000. So a credit dollar for dollar is much better than a deduction because it impacts you a lot more. They’re both good, but the credits could be [crosstalk 00:09:37].
Scott Schang: Well, they’re better together is the way I see it.
Bryan Schurter: Right.
Scott Schang: You don’t have to choose.
Bryan Schurter: [crosstalk 00:09:43] credit as you can for sure.
Mortgage Interest Changes
Scott Schang: Now, let’s talk about the home ownership changes here. There were some pretty major changes around home ownership. Now, this is important whether you own or whether you’re buying this year. These are going to apply. Let’s start with the $750,000 interest deduction or that cap and what that means. What changed there?
Bryan Schurter: Before the tax reform bill, if you had a mortgage of over a million, you do cap at a $1 million of mortgage. So if your mortgage loan amount was $1 million or more, you could only deduct the interest paid on that mortgage of up to a million dollar loan amount. So the tax reform bill backdated a little bit.
So if your loan originated or is treated as originated on December 15th, after December 15th of 2017, then the cap is $750,000. So if your mortgage is under $750,000, this isn’t going to impact you whatsoever. But if your loan amount is over 750, then the interest you pay on the loan can only be deducted on the 750,000 or a portion, if that makes sense.
Scott Schang: Okay. So for new home buyers, if you’re buying about a 950 to a million dollar home, 20% down with that size loan amount in your kit max, you’re capping out your mortgage interest. That’s significant, but let’s be honest that the overwhelming majority of Americans are not going to even come close to scratching that. Right?
Bryan Schurter: [crosstalk 00:11:51] so yeah.
Scott Schang: Another thing that changed is there’s a $10,000 cap on what they’re calling a SALT. Explain to us what the SALT cap is.
Bryan Schurter: Yeah. So the SALT, which is SALT it’s an acronym for a State and Local Taxes. So your state and local taxes that you’re able to deduct, in the past, for the most part, again, there’s a bunch of ifs, ands and buts.
But for the most part, your property taxes or state income taxes, you were able to deduct those off of your income if you itemize. Today, you can still do that, but there’s a cap of $10,000.
So if your property taxes combined with your state income taxes is over $10,000, then you’re going to be capped at $10,000. If it’s already below 10,000 and it’s not going to affect you either. For majority-
Scott Schang: This again-
Bryan Schurter: Go ahead.
Scott Schang: No, I’m sorry. I was going to say this again. Sounds a lot like the $750,000, the interest deduction on the mortgage interest, this seems like it’s not going to impact the majority of people. Maybe a lot of people in California.
Bryan Schurter: Well that’s what I was going to say. That’s what I was going to say. For the majority of people in America, these two deductions are probably … these two changes are probably not going to affect too many people.
But for high income and high property tax and high income tax states like California, New York, New Jersey, then this is going to have a fairly good impact on those people who’ve already been itemizing, who have already been taking these deductions.
Now for a new homeowner, for a new buyer, because they’ve never had these deductions before, they’re going to benefit from it and they’re not going to quite realize the impact of the fact that there is a cap because they are still going to get the benefits of all of it.
So for a new home buyer, I don’t think they’ll actually see the difference. Is only those that have gone above these caps in the past that will feel the difference.
Scott Schang: And have some perspective, right? So they have [crosstalk 00:13:56] a little bit different. And again, it’s only in certain circumstances where your state and local taxes combined are going to exceed 10,000. But even if it exceeds, let’s say it’s 12,000, I can still do a deduction of the 10,000 up to the cap, correct?
Bryan Schurter: Correct. If you’re above, that’s fine. You don’t lose everything. It’s just you just cap it $10,000.
Scott Schang: Just hard cap, just right up to 10.
Bryan Schurter: Right.
HELOC and Second Mortgages
Scott Schang: Okay. Last thing with housing is, home equity lines of credit or second mortgages. Now, this one is a little trickier because there are a lot of exceptions. But let’s talk about using a, like a piggy back mortgage. So home buyers.
So if I’m a home buyer and I’m using home equity line of credit or a second mortgage to avoid mortgage insurance, 80, 10, 10, something like that, I can write off the interest on that second mortgage, correct?
Bryan Schurter: Correct, correct. It was modified a little bit, but as far as using it to buy, build or substantially improve a property, you can still do that.
Scott Schang: But what changed, and I know we get a lot of visitors to findmywayhome.com on this question is, is my HELOC still tax deductible? Now, there are circumstances where on my equity line of credit, you can no longer write off the interest on that. Correct?
Bryan Schurter: Correct. And that is where you should talk to your tax preparer, your tax professional.
Again, with a lot of the ifs, ands and buts, it’s hard to make blanket statements, especially in just a short time that we wished you were talking but not in anybody’s specific situation, if they already have a HELOC and they’ve been riding off the interest, I would definitely recommend talking to professional and that them clear up what they are, what they are not able to deduct.
Scott Schang: That’s a good way to leave it because there’s some nuances around that. Around how you use that second mortgage that would determine if it’s deductible or if a portion of it is deductible. So nice, safe move there. Good pay there.
We’ll put it, you go talk to your professional. I don’t want to get anybody in trouble here. Now let’s talk about preparing for this change. You and I had been talking about this, about these changes and what we wanted to talk about and you said something that I thought was really, really important for people to understand is that if there’s a good chance that a lot of people out there watching this have already realized the benefits of the 2018 Tax Law. Is that correct?
Bryan Schurter: It is correct. And this is where there’s good news and bad news. So if you’re an employee and you’re receiving a paycheck, there’s been changes that occurred on your paycheck back in probably February of last year in 2018.
So when the tax reform bill passed, there was a new tax withholding calculator, the amount of withholdings that you have with however you paycheck for taxes. So when you put single zero, married zero, married to on your paycheck, there’s a calculator that withholds a certain amount of money based on your specific paycheck.
There’s a calculator that works that calculation. The calculator change the way it calculates beginning and the end of January, for most employers that beginning of February. So everybody started seeing an increased amount in … If everything else stayed the same, the take home would have increased for the simple fact that they’re withholding for federal taxes was decreased on their paycheck.
Scott Schang: And that would have been the brackets, right?
Bryan Schurter: [crosstalk 00:17:51] because of the brackets. Right. So even if you didn’t change, if you’re married to and you stayed married to, you start having less withheld federal taxes most likely at the beginning of February. So you already felt those changes.
Now, I said good news and bad news, if you didn’t realize those changes happen on your paycheck. You didn’t realize that your paycheck went up, 10, 15, 50, a hundred dollars a paycheck, you may not know you’ve already been getting some of those benefits out of that.
And so you might be in a little bit of a shock this year taxes that the refund that you’re used to getting might be reduced only simply because if you are getting your refund more spread out throughout the year on your paycheck.
Scott Schang: So what you’re saying is the remainder of your refund, you’ve already kind of been trickling it in.
Bryan Schurter: Right. So My big concern is a lot of people who didn’t notice this on their paycheck will see a change on their taxes even though their taxes may have gone down, even though their taxes may have stayed the same and the tax reform bill didn’t affect them too much, their refund maybe less or the amount owed maybe more simply because of their paycheck changes.
So if that did happen and people did not be aware of it, I’d recommend making changes to your paycheck if you need to to get it back to where you want. But sometimes people like the money more each month, they don’t want to get too big of a refund. And so it works out well for them too.
Scott Schang: So we started this conversation because, well, for you it’s a little bit different. Everybody comes and sees you during tax time. So you get slammed for the first quarter of the year, another reason why I really want to thank you for making time to be here and why we dragged our butts in here early.
At least it feels early to me. But we talk about this. If there’s a little bit of a shock there, when you’re talking about your withholdings, your one and your zero and you’re married, and how many dependents, that’s your W9, correct?
Is that where you establish at the beginning of the year or actually you can do it anytime [crosstalk 00:19:58]?
Bryan Schurter: On your W4. [crosstalk 00:20:01] for the federal taxes, right. [crosstalk 00:20:05].
Scott Schang: So this year, review that with your tax preparer when you’re doing your taxes because the way that you’ve set up, and I know a lot of people, sometimes they manipulate those numbers because, oh, at the end of the year they want a bigger refund at the end of the year.
Just pay attention to that. Like what Brian mentioned, you may have been getting some of that benefit before your deductions or your withholding strategy may have changed in light of some of the 2018 Tax Laws.
You may be able to make some, even some additional withholding adjustments if you’re using a standard minimum deduction and you have child tax credits and it looks like you’re going to be one of those people that are really going to benefit from those things. There might be an opportunity there.
Scott Schang: So I think you said it best, Brian and we don’t want to wait too deep in the quagmire that this could turn into, down these rabbit holes cause everybody’s different. Everybody’s financial situation is different.
Everybody sets things up. So absolutely consult, your professional and your tax preparer professional and go through these and be prepared for these.
Scott Schang: For home buyers, I think this is a pretty exciting time. The tax rates are still there. The tax deduction has never been the reason to buy a home.
It’s always just kind of been one of the benefits of buying a home and in certain price ranges now because of the tax laws, the mortgage interest and itemizing is not going to be as important. But a big part of that is going to be because your income tax, you’re going to get breaks in other areas.
The only reason you would stop taking the tax deduction is if you were able to take a higher deduction without having to itemize. Right?
Bryan Schurter: Right. So, even if you’re not getting the benefit this because the standard deduction increased, you’re still getting a benefit.
Scott Schang: Yeah, absolutely. Hey, that’s good enough. Okay. So that’s it. Didn’t want to go glaze anybody over too bad with a bunch of technical talk. You did an amazing job of speaking English clearly and I think we did a good job of making this topic easy to understand.
And most importantly, yes, there are changes. Yes, it will impact everybody. It’s going to impact everybody a little bit differently. It’s going to impact everybody that pays taxes, impact everybody a little bit differently so consult your tax professional.
And if you don’t have one … You know what? I do want to touch on this real quick, Brian.
Should I Hire a Professional?
Scott Schang: I always encourage people to talk to a tax professional. I don’t know if they think it’s crazy expensive. I’m telling you it’s not crazy expensive.
It’s a little bit more expensive than buying software, but this is not a good time to rely on software in the middle of a major tax overhaul. And we’ve had this conversation before because a lot of times with those tax softwares, your deductions are based on knowing which questions to ask and knowing how to answer certain questions. Is that an accurate?
Bryan Schurter: Right. Obviously I’m a little biased in my opinion on tax software, but the main thing that I have, it’s just because I’ve seen it over and over again, is people coming in to have their taxes done. They tried doing it on their own.
They show me what they got as a result. I show them where there may be some mistakes that were made and sometimes it’s simply as, you answered the question correctly, but it wasn’t the correct question for you. And so it puts it into a different bracket, puts it into a different category.
I can’t tell you how many times I’ve saved people hundreds, a few people, thousands of dollars just because the numbers didn’t change. They were just in the wrong box. They were in the wrong category, they were in the wrong section.
Bryan Schurter: When someone realizes they made a thousand dollar mistake, they sometimes will go seek a professional. But what if you’re only making $100 mistake or a $200 mistake? You may not go seek out that help because you didn’t know.
A $2 didn’t seem like a whole lot maybe, but a thousand or 2,000 difference, you might seek that. So a really good professional too, which I just want to touch on, is not only going to … and this is the issue I have a software too, is that it usually just looks in the past.
Most of the time we do our taxes, we look at a year ago, we’re not looking ahead. We’re not noticing those changes. And when you have a professional who does look at in the future for you and says, look, your paycheck is like last year.
Your paycheck has changed. This is a rough idea of what your taxes are. Get a good estimate of where taxes are going to look like next year because of these changes.
Bryan Schurter: Software right now isn’t as far as I can tell good enough to notice little changes in your life and give you a heads up. Software doesn’t know if you’re going to have a baby this year, your professional might notice and you come in, you’re pregnant and say, hey look, “You’re going to get a 2,000 off your credit next year because of that.”
So just simple things that a human contact is much better than, like you said, most of the time I’ve found you’re not actually paying more because the money that you are paying a professional to do it, you’re actually saving the taxes.
But really seek out somebody who is going to help you in the future as well. The past is fairly easy. It’s done. There’s only so much that we can do with it, but a really good professional is going to help you look forward and look at some changes are coming forward for your specific situation.
Working with a Professional
Scott Schang: I can never understate the importance of having good professionals in your corner. The analogy to that is … what you’re describing with tax software is synonymous with some of the kind of the big box refi lenders that run TV commercials constantly on TV, trying to get people that do business as they try to commoditize that alone.
Like they want you to be able to walk into a store and pick up alone, and then you lose the financial planning aspect of it. You lose the professional advice and you lose the surrounding yourself with professionals that specialize in areas of your business that’s going to help you and your family and you could possibly have expertise in all of those areas.
Scott Schang: And we battle the same thing. That’s that constant struggle for convenience versus competence. And I think that sometimes they are mutually exclusive.
It seems like. You could have a degree of competence with this automation in the software, but it doesn’t know what it doesn’t know, and that’s why you want to really consult. It doesn’t know what it doesn’t know, it doesn’t know what you don’t know. So that’s why you want to talk to a professional.
Scott Schang: So Brian, I don’t want to take any more of your time. If I’m not mistaken, I see a line of about 73 people outside your door trying to get their taxes done. So I’m sure you’re going to be busy today. So I really appreciate you being on here today and I hope you survive another tax season and I’ll see you on the other side.
Bryan Schurter: Thank you, Scott. I appreciate it. I hope that little bit of information I provided helped a little bit.
Scott Schang: Absolutely. Absolutely. Thanks Brian. Have a great day.
Bryan Schurter: You too.
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