Tag: Tax Planning.

Tax Rule Changes

With regards to your tax, mortgage interest deduction is always claimed on schedule A of your federal return. So, the first observation is that many people will simply no longer get any value from their mortgage interest because the new standard deduction is twice as much as before.  In 2018, the new tax rule dictates that second mortgages and Home Equity Lines of Credit (HELOC) are no longer deductible.  When “HELOC” interest became deductible they were not so common and had smaller balances but over the last several years they have become a popular way to fund the giant college spending needs for many, and for others, they have become a popular way to finance vacation homes and even investment property.

So, what can you do to fix this problem?

First, relax! The changes are not necessarily going to mean an increase in taxes at all.  In fact, many people may see a lower tax bill because of the increased standard deduction.   However, anyone with a large amount of HELOC debt should sit down with a tax planner and look at alternatives.  People who used HELOCs to pay for college or are currently using it because they felt they would not qualify for student loans may now want to find a college planner and really try hard to find that kind of loan. Educational loans are still deductible on a part of the tax return that is not connected to schedule A. So you might still enjoy that deduction as well as the big increase in the standard deduction.  People who used it for investment property might go and seek out a commercial mortgage to replace the HELOC. Even with generally higher rates and closing costs it could be beneficial.  Moving the interest to a line expense on your Schedule E (investment property schedule) and off your Schedule A might more than make up for the cost associated with getting the new loan.

There are also many lesser-known but very smart bank products out there to replace both a traditional mortgage and HELOC and wrapping them into an “All in One Loan”. This is a primary mortgage and still fully deductible but also leaves HELOC like access to equity.  That access could be used for either investment, for college funding, or whatever you fancy.  More importantly, it applies payments to principle first, before interest, helping people to pay off a home potentially much faster than a traditional mortgage without making larger payments.   See http://www.aiosim.com/Simulator/GetStarted for additional information.

Lastly, the mortgage interest deduction is now limited to the first $750,000 in principal loan amount (it was previously a $1,000,000 limit).  That’s not a problem for people who had already established their mortgage before December of 2017. They are “grandfathered”.  Going forward, it is simply “buyer beware” that $750,000 is the new deduction limit.  If you can afford a million dollar plus home then you are likely smart enough to find a creative way to buy the mortgage down to $750,000 loan.  You could also take out two loans, one for $750,000 and another for the balance. The tax law does not prevent you from buying a 1.5 million dollar home. You simply cannot get a tax deduction for any mortgage above $750,000.

As I write this I can hear the wheels turning. UNDER NO CIRCUMSTANCES would it ever make sense to take money from pre-tax accounts like 401(k)s to pay down mortgages or fund refinances or purchases. The lack of a deduction would be a small penalty in comparison to the financial suicide of taking retirement money out while working.

So, what is the summary of the information dump above?  Go see a Tax Planner!

“Plan Early and Plan Often!”™


Soon after the trick-or-treaters are done banging on your doors its time for fall wrap up. Remaining lawn chairs, storm windows, et cetera, are dealt with ahead of winter except for places here in the Southwest.  Here in Scottsdale, winter is just a nice break from the heat.  In 2016 we had 30 days of 110° or higher and average 110 days of 100° weather. Crazy, isn’t it?  But, for a majority of the country that lives in the Snowbelt, November means batten down the hatches. The same is true for finance and tax planning. Many people start looking at holiday shopping budgets and year-end projections to see if they are on target.  Tax 911 calls usually start in early December.

I’m going to talk about the most used tax planning concept in the month of November and December, charitable planning.  If you’re a regular contributor to charities, good for you. There are many ways to do this beyond simply writing a check to a charity and saying goodbye money.  Savvy investors often create “Donor Advised Funds” (DAF) with a financial planner.  It’s a simple subset of a 501c charity that allows you to name your fund. In many cases, you can control the investments inside your funds, or at least have some say, and then finally, make recommendations to the 501c about where to send that money.  The fund normally follows your recommendations. The only caveat is that the charity must qualify by IRS rules.

Here is an Example:  The Smiths give $10,000 a year to their church and several local charities that they care about.  Rather than simply writing those checks, Mr. and Mrs. “Smith” decide to use their own personal philanthropy as a learning experience to make sure their children understand the importance of giving. Perhaps planting the seeds so that their children don’t become too entitled.  They also asked their children what charities they would like to give to and why. Then, instead of giving money directly to their church and charities, the parents create the “Smith Donor-Advised Fund”.  They name themselves as the trustees of the funds, and their children are the successor trustees of the fund.

With a DAF, the family gets to name charities that it wants to donate to today. In addition, they state the purpose of their charitable giving as a guideline for the document and build in flexibility for the future. The trustee can add or subtract churches and charities. Therefore, if a charity stops needing funds because it’s endowed by another greater charity or it merges with another charity or for any other reason, they can instantly change recipients of the Fund.

Most likely, even though it’s been happening for years most children are truly unaware of the gravity of the size of the gifts that their families give. Soon they will be talking about the fact that they’ve started a permanent lifelong charitable foundation that will be in effect their entire lives and their children’s lives, and tell their children that someday they’ll be in charge of this charity and they’ll have to make the decisions that you’re making currently today.  The children can then help decide what types of charities to fund.

Here is the best part; the money put into the DAF will provide a tax deduction even though the actual gifting to the charities might not happen in the same calendar year.  A $10,000 deposit in the family Donor-Advised Fund gets treated as a $10,000 deduction on their schedule A in the year it is made.

Contributions can be many different types of assets:

  • Cash
  • Highly appreciated stock
  • Mutual Funds shares
  • Real Estate
  • Shares in privately held businesses

You potentially could contribute highly appreciated stock or real estate at its current value and get a deduction of up to 50% of your AGI in the year of donation while avoiding having to pay tax on the accumulated capital gains.  Imagine donating stock in which you originally invested $50,000 with a current value of $250,000.  You could get up to a $250,000 charitable deduction and avoid capital gain tax on $200,000 in accumulated capital gains.  This could be a significant tax windfall.

Much tax planning these next weeks will be charitable in nature. Talk to us about a Donor-Advised Fund that you can name, guide, and control the assets in, and take your family philanthropy to the next step.

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