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5 Fallacies and Misapprehensions of the Latest Tax Reforms and Legislation
For most Americans, the process of income tax is over, done and dusted with returns having being filed already. However, legislation that has been brought into force late last year has thrown up a whole set of rules and regulations.
Affected taxpayers should take professional advice if necessary and get to the bottom of the changes. This is because there are several important provisions that have already sowed the seeds of confusion amongst taxpayers.
In fact, a study has shown that a substantial 13% of taxpayers have not even heard of the reforms that have come into force and others who have are not clear on the core issues and changes. This will surely act as a stumbling block when tax matters have to be planned ahead of the next accounting year.
Fallacy #1 – Tax returns will be easier to file
One of the objectives of tax reforms and tax reformers, whenever the exercise is taken up, is a simplification. That means it eases the work of tax filers. Now to this premise has been partially kept in mind. About 20% of all taxpayers will now switch from itemizing to opting for the standard deduction.
What this means is that records of every small item eligible for deduction need not be meticulously maintained but a flat standard deduction amount can be claimed. This surely eases things but those opting to itemize will not find filing returns any simpler than what it was before.
Tax experts are of the opinion that apart from the increased standard deduction, the legislation leaves much to be desired in the area of simplification. Additionally, there are certain provisions that have been enacted which includes tax shaving break of a 20% deduction for those who own a “pass-through” business.
Not only does it require complicated tax calculations that have never been tried in the past, but the law is also not clear about which businesses can take benefit from this new provision.
Fallacy #2 – Restrictions on deductions on mortgage interest
This is a complete misapprehension as the majority of homeowners will get the full benefit of mortgage interest deductions as before. There have been minor changes though. Now, mortgage interest applicable up to a debt of $750,000 only, inclusive of a primary home and one additional dwelling is only deductible.
But that covers the majority of homeowners in the USA considering that the median price and loans are near $246,000 according to the National Association of Realtors. This is reduced more when the 20% down payment made by borrowers is taken into account.
This fallacy is further negated when it is understood that the new legislation is relevant to all loans taken out after Dec. 14, 2017 only. Even a million dollar debt limit with mortgage interest deductibles applicable in 2017 before this cutoff date is available in 2018 too.
Fallacy #3 – Interest is not deductible on home loan equity loans
In the latest tax reforms, borrowers with home-equity loans are not eligible for interest deductions. But contrary to belief, the deductions can still be claimed based on how the loan proceeds are utilized. If the borrowed amount is used for home renovation, adding a new wing or buying a new home altogether, the borrowed amount can be claimed as a tax deduction.
However, if the borrowed home-equity proceeds are used for any other purpose such as buying a vehicle or paying off other debts like credit card dues, the interest on the loan is no longer eligible for deduction. Borrowers wishing to avail of the deductions will have to carefully monitor how the home-equity borrowings are utilized.
Fallacy #4 – It is no longer possible to claim tax breaks for kids
In the latest tax reforms, the personal exemption has been withdrawn. This means that the $4,050 deduction that was available for spouse and each dependant is no longer there. However, this has been compensated by the improved child tax credit.
It goes like this. For children under 17 years of age, the tax credit has almost doubled to $2,000 with an additional $500 credit for dependants. Hence kids who are older, as well as parents who are dependants, are eligible for the new credit.
Further, there is a substantial increase in income levels for this eligibility, bringing in more families who are eligible for this benefit. On the whole this more than offsets the withdrawal of deduction.
Fallacy #5 – Federal taxes have no bearing on State tax structure
This is not entirely true until a State has its income tax systems based largely on the Federal structure. A case in point is Arizona whose tax system is based entirely on the Federal code.
In such cases, drastic changes at the Federal level can impact the taxes paid by residents. When reforms are aimed at broadening the Federal tax base, excluding certain exemptions and deductions and subjecting more income to taxation, Congress usually steps in by cutting Federal tax rates.
In the present tax reform scenario, States have not yet made any rate cuts or other adjustments and this will see a rise in their revenues. This will result in a large number of taxpayers receiving a cut at the Federal level which will be negated by a State tax increase unless States step in to correct this anomaly.
Given these factors and fallacies, it is very important that people closely monitor the various aspects of tax reforms that have been initiated and plan out their commitments accordingly.
If you are looking for a reliable partner to delegate your tax return preparation tasks, get in touch with our expert team at Cogneesol! You can call us at +1 646-688-2821 or email at [email protected]
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