2018 Tax Reform Updates & Clarifications Explained

Individuals:

Home Equity Loans & Home Mortgage Interest:

Responding to many questions received from taxpayers and tax professionals, the IRS said that despite newly-enacted restrictions on home mortgages, taxpayers can often still deduct interest on a home equity loan, home equity line of credit (HELOC) or second mortgage, regardless of how the loan is labeled. The Tax Cuts and Jobs Act of 2017, enacted December 22nd, suspends from 2018 until 2026 the deduction for interest paid on home equity loans and lines of credit, unless they are used to buy, build or substantially improve the taxpayer’s home that secures the loan.

The itemized deduction for home mortgage interest is limited for tax years 2018 through 2025. A taxpayer is limited to claiming the home mortgage interest deduction only for interest paid or accrued on acquisition debt during those years. The maximum amount that may be treated as acquisition debt is also reduced to $750,000 ($375,000 is married filing separately) for any acquisition debt incurred after December 25, 2017.

The $1 million ($500,000 for married filing separately) dollar limit will also continue to apply to a taxpayer who enters a binding written contract before December 25, 2017, to close on the purchase of a principal residence before January 1, 2018, so long as the residence is purchased before April 1, 2018. Similarly, the higher limit continues to apply to any debt incurred after December 15, 2017, to refinance existing acquisition debt on the taxpayer’s principal residence to the extent the amount of the debt resulting from the refinancing does not exceed the amount of the refinanced debt.

Businesses:

Business Meals and Entertainment Deduction:

Deduction of Business Interest:

The deduction of business interest for all taxpayers is subject to an overall limitation for tax years beginning after 2017 to the sum of 30% of the taxpayer’s adjusted taxable income, business interest income, and floor plan financing. Any disallowed interest generally may be carried forward indefinitely. In the case of a partnership or S corporation, the deduction limitation applies at the entity level, except that disallowed interest of the entity is allocated to each partner or shareholder as excess business interest. The business interest limitation does not apply for small businesses with average gross receipts of $25 million or less.

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