Tax Law Update: New Information on What's Deductible—and What's Not
March 19, 2019
As principal and founder of The Washington Update, Andrew H. Friedman is not affiliated with Merrill Lynch. Opinions provided are his, do not necessarily reflect those of Merrill Lynch and may be subject to change. Neither Merrill Lynch nor its advisors provide legal, tax or accounting advice. Please consult your tax advisor about the insights provided here.
WHETHER YOU’RE PREPARING TO FILE your first return under the 2017 Tax Cuts and Jobs Act or are already looking ahead to next year’s taxes, you may find yourself confused about specific parts of the law.
“The Act was passed very quickly, and there were a lot of holes and unanswered questions,” says noted tax specialist Andrew H. Friedman, principal and founder of The Washington Update. “The IRS spent much of 2018 providing guidance, a good deal of which is actually favorable for taxpayers.”
In a new paper, “Tax Reform Aftermath: New Guidance for Taxpayers,” Friedman details some of that guidance. Here are three rule clarifications that you may want to discuss with your advisor and tax specialist, depending on your situation. For a more comprehensive look at the IRS’s latest guidance, check out Friedman’s paper here.
PRESERVED: Deductions on home improvement loans
The wording of the tax law initially could be read to eliminate homeowners’ ability to deduct interest on home equity loans and lines of credit (HELOCs). “But the IRS has clarified an exception for those who use the proceeds specifically to reinvest in the home that secured the HELOC loan,” Friedman says. “If you build a new wing or renovate your kitchen, and you tap into your line of credit, the interest is deductible. That is not something you necessarily would have come away with, based on the wording of the law itself.” But keep in mind that if you use the proceeds for non-home expenses, such as college tuition or to pay off credit card debt, the interest is not deductible, he notes.
These insights from noted tax specialist Andrew H. Friedman, principal and founder of The Washington Update, can help as you prepare to file your first return under the complex 2017 Tax Cuts and Jobs Act, and start your tax planning for the year ahead.
If you used home equity line of credit proceeds during 2018 and you are claiming interest expense as an itemized deduction, Friedman advises that you consider how much of the money you borrowed went toward home improvements.
Because these taxes are set to revert to their previous lower levels in 2026 (or sooner, potentially, if the balance of power in Washington shifts), taxpayers with sizeable estates may wish to transfer wealth through large lifetime gifts while the exemptions remain high, Friedman notes.
As you compile your business expenses, be sure to keep receipts for meals separate from those for entertainment, Friedman advises, so that you can continue to deduct them.
The IRS spent much of 2018 providing guidance, a good deal of which is actually favorable for taxpayers.tax specialist and principal/founder of The Washington Update
CONFIRMED: Advantages of making large lifetime gifts now
The new law doubled the lifetime exemption for estate and gift taxes. Adjusted for inflation, the exemption for 2019 is $11.4 million per person, or $22.8 million for a married couple. But those higher levels are scheduled to revert back to about half of the current exemption in 2026. Some taxpayers are concerned that, if they give away $11 million today, $5 million of that gift will be subject to estate tax if they die after the exemption returns to $6 million. Those taxpayers can now relax. ”The IRS has confirmed that there will be no claw back. If a gift is exempt at the time you make it, it doesn't matter what the exemption is when you die,” Friedman says. “So, depending on your circumstances, it might be wise to take advantage of the higher exemption and make large gifts now.”
STILL DEDUCTIBLE: Business meals
When the new law eliminated deductions for business entertainment expenses, business owners feared they would lose their longstanding ability to deduct 50% of the cost of business meals as well. “That could have gone either way,” Friedman says, “but the IRS has made clear that you can continue to deduct half of the cost of business meals, as long as the cost of the meal is separately stated from the cost of contemporaneous entertainment, if any. Say, for example, you take a client to a baseball game. You could still deduct half of the cost of hotdogs and sodas, since that’s separate from buying tickets to the game,” Friedman explains. “But if you invite a client to watch a ballgame in a luxury box where meals are included for box patrons, you can’t deduct half of the cost of those meals,” he notes.
Friedman cautions that these suggestions may not be right for you, as tax planning must take into account your particular situation. Accordingly, you should review these and other tax planning suggestions with your financial and tax advisor.
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