While the actual tax code relating to the new tax reform bill is still be written there are some key takeaways most Californians need to understand about tax reform and specific deductions going forward. In a nutshell, be prepared to have less deductions and therefore ultimately pay a larger amount to the IRS. The two primary deductions affecting Californians filing a federal tax return for tax year 2018 and beyond relate to state income taxes and the deduction of mortgage related interest on new loans which exceed $750,000 on your property. If you purchase a new home you should be able to deduct up to $750,000 of mortgage related interest. If you refinance an existing mortgage which was in place prior to December 14, 2017 you may still be able to deduct the interest up to $1 million in principle as long as the amount refinanced did not exceed the amount of the previous loan.
However, the new tax laws wipe out the deduction for all home equity debt related payments, including existing loans beginning in tax year 2018.
You will still be able to take these deductions in the returns you file this year which relate to the 2017 tax year. What else do Californians need to understand about tax reform and new tax law changes?
One of the largest tax deductions for many Californians related to the deduction of State and Local Taxes, now referred to as the “SALT” deduction. Previously, California taxpayers could deduct state and local income or sales taxes as well as property taxes as individual deductions. Under the new law these are grouped together under the SALT deduction which is limited to $10,000 for individuals as well as married filers. Many Californians attempted to pre-pay 2018 property taxes before the end of the year in an attempt to create deductions for tax year 2017. Unfortunately the IRS determined (12/27/17) only 2018 taxes which were already “assessed” could be deducted when “pre-paid.”
Allen Barron provides domestic and international tax planning, tax preparation and filing, estate planning and trusts, business succession planning and other integrated accounting and legal services which help Californians to minimize their tax burdens. What do Californians need to understand about tax reform and how will it affect your present and future taxes? We invite you to contact us or call 866-631-3470 for a free consultation to learn how to restructure your strategy for 2018 and beyond.