Tax Q&A: Mortgage Interest Deduction And Other Matters
Here are some questions we've received from readers about the House tax plan released Nov. 2. (The answers match the plan as of Nov. 5, and could change as lawmakers debate.)
Q: Can you clarify proposed changes to the mortgage interest deduction?
A: Yes. Under current law, individuals can deduct interest on loans of up to $1 million to purchase, build or substantially improve homes and up to $100,000 for home-equity loans. The same is true for second homes.
Under the proposal, the $1 million cap would be lowered to $500,000, starting with mortgages taken out after Nov. 2. Buyers wouldn't be able to deduct mortgage interest on new purchases of second homes.
Interest on loans between $500,000 and $1 million for pre-existing loans could be deducted. Refinancings of pre-Nov. 3 loans greater than $500,000 would also produce deductible interest. The bill isn't perfectly clear, but it looks like a similar grandfather clause applies to second homes with loans taken out before Nov. 3.
Under the proposal, interest on home-equity loans taken out after 2017 wouldn't be deductible.
Q: Is the proposed property-tax deduction a flat $10,000, or $10,000 per house if you own a second home?
A: The limit applies per tax return, not per home. Under the plan, individuals and married couples filing jointly can deduct up to $10,000 in real property taxes. Married people filing separately can deduct up to $5,000 each. As under current law, these are itemized deductions, generally used only if the taxpayers' deductions exceed the new, higher standard deduction of $24,400 for married couples, $18,300 for heads of household and $12,200 for individuals.
With the deduction for state income and sales taxes repealed, fewer people will have deductions (largely for mortgage interest, charity and property taxes) that exceed the standard.
Under the proposal, taxes remain fully deductible for businesses that own property.
Q: Currently, seniors have an increased standard deduction. Does that change?
A: Yes. Under current law, there is an additional standard deduction for elderly taxpayers (those 65 and over) and blind people. That deduction in 2017 is $1,250 for each married spouse meeting the definition and $1,550 for others. That deduction would be repealed as part of the expansion of the standard deduction.
Q: Do capital-gains taxes change?
A: No. The bill would leave in place the current brackets and income thresholds for capital-gains taxes, which would now be different from the brackets for other income. There are three capital-gains tax brackets, 0%, 15% and 20%. In 2018, under the proposal, that top rate would kick in at $479,000 of income for married couples, less than half of where the top bracket for ordinary income starts.
The bill also leaves in place a 3.8% tax on investment income, including capital gains. That tax applies to individuals with incomes exceeding $200,000 and married couples exceeding $250,000.
Q: What happens to the taxes on high-income households created under the Affordable Care Act?
A: Nothing. This bill doesn't touch the two Obamacare taxes that apply to high-income households: A 0.9% tax on wages above $200,000 for individuals and $250,000 for married couples and a 3.8% tax on investment income with those same thresholds.
Republicans had talked about repealing those taxes as part of their health-care legislation. But neither provision is in this measure.
Q: What happens to like-kind exchanges?
A: Like-kind exchanges are transactions in which investors swap properties. In such a swap, a taxpayer doesn't have to report capital gains as she would if the property had been sold. The taxpayer transfers her cost basis in the first property to the second and generally is taxed on those gains only if there is a sale.
The technique is popular in the real-estate industry, and the bill preserves like-kind exchanges of real estate. It would forbid them for other assets. That includes art, where such exchanges have become popular.
Q: Am I correct in believing that the current plan does away with the alimony deduction, including for those who are already paying?
A: Yes and no. Under current law, alimony is deductible to the person who pays it and income to the recipient. Under the proposal, alimony would no longer be deductible and it would no longer be income to the recipient.
However, that would only apply to divorces and separation agreements finalized after Dec. 31.
Q: What happened to President Donald Trump's campaign proposal to change the tax treatment of carried interest?
A: Carried interest is the profits-based earnings of venture capitalists, private-equity partners and real-estate professionals. It's taxed as capital gains, at rates up to 23.8%, rather than as ordinary income, at rates up to 39.6%, even if the people in question don't have their own money at stake.
Mr. Trump talked during the campaign about changing these rules; the bill doesn't do that.
Q: What happened to Mr. Trump's proposal that all business expenses be deducted immediately instead of depreciated?
A: That's in the bill -- sort of. The bill creates such "full expensing" for investments placed in service between Sept. 27, 2017 and Jan. 1, 2023. But the provision expires after that and regular depreciation rules return. That's a concession to the budgetary constraints Republicans placed on themselves in the bill. They may attempt to come back in 2022 and extend the provision.
The plan also doesn't allow immediate writeoffs for real estate and certain regulated public utilities.
Q: Is there anything in the proposal that ends U.S. taxation for expatriates?
A: No. Republicans, including Rep. George Holding (R., N.C.), had talked about exempting individual income earned outside the U.S. That would roughly match the proposal for businesses. The idea, backed by groups of expatriates, wasn't included in the bill.
Q: Does the Tax Cuts and Jobs Act seek to change the way Social Security income is taxed?
A: The proposal doesn't appear to change the taxation of Social Security benefits.
Write to Richard Rubin at richard.rubin@wsj.com
(END) Dow Jones Newswires
November 06, 2017 13:46 ET (18:46 GMT)