Accounting On Us
Tax reform myths debunked
Don't miss out on tax benefits
Tiffany McBride, CPA
Changes to the tax code can be a lot to unpack – especially a huge reform like the Tax Cuts and Jobs Act (TCJA) passed at the end of 2017. Misconceptions can make the task even trickier. That’s why we’re debunking the myths, so you don’t miss out on tax benefits.
Myth: Home equity interest isn’t deductible
There are two types of loans that can be secured by your properties. The first kind is home acquisition debt. This debt includes debt used to buy, build or substantially improve your home. Home equity debt would be anything else. Acquisition debt is still deductible under TCJA, with certain limits discussed below.
For example, if you went to your bank and took out a “home equity loan” against your house to upgrade your kitchen, that would still be deductible. If you instead used the proceeds from your “home equity loan” to buy a new car and pay off credit cards, that would not be deductible.
You may also deduct the interest if the proceeds from the “home equity loan” are used to invest in the stock market or buy a business; that interest is also still deductible as either investment interest or business interest.
There are new limitations on the amount of debt you can deduct the interest on for acquisition debt. If you purchased a new home after December 15, 2017, under the new law, you can deduct the interest on a mortgage up to $750,000. If you bought your home before that date, you’re grandfathered in under the new rules and you can deduct interest on a mortgage up to $1 million.
Myth: You can’t deduct business meals anymore
There was initially confusion over the deductibility of business meals after the passage of the TCJA because the new law did away with deductible entertainment expenses. Under the old law, you could deduct 50% of entertainment expenses (with stipulations). For example, maybe you bought tickets to an Arizona Cardinals game, took a client to the game for business reasons and had a meal at the stadium. In the past, you could deduct 50% of the tickets and the meal. TCJA eliminated the deduction for the ticket, but there was uncertainty if the meal would be still deductible under the new law.
There’s good news for you, though. You CAN still deduct business meals – subject to the 50% limitation and you must still meet several tests to qualify for the deduction:
- It cannot be lavish or extravagant
- The taxpayer, or an employee of the taxpayer, must be present
- The expense is ordinary and necessary to carrying on a trade or business
- The meal is for a current or potential client
- If food and beverage is purchased with entertainment, the food and beverage portions must be broken out on the invoice or billed separately
Myth: Tax reform only benefits the rich
The new law made several changes that will benefit many taxpayers, such as the lowering of tax rates, the increase in the standard deduction and the child tax credit.
For the most part, tax rates went down – five of the seven rates are lower under the new law.
The standard deduction basically doubled. For single taxpayers, it increased from $6,350 to $12,000; from $12,700 to $24,000 for married filing joint; and from $9,350 to $18,000 for heads of household. (The “additional standard deduction” – an extra $1,250 for a blind individual, or anyone over the age of 65 – still applies under the new law.)
The child tax credit goes up to $2,000, and $1,400 of that is now refundable. The credit also now phases out at a much higher level.
Myth: I have to figure this all out on my own
If you have questions about how the new tax law applies to your situation – on an individual or business level – be sure to talk to your Henry+Horne tax advisor to make sure you’re taking advantage of every opportunity!