presented by: Vision Financial
Much has been made about the changes in the tax law passed by Congress at the end of 2017. The details and how they affect each taxpayer are frankly, dizzying. We will focus on three areas that perhaps you may not have seen a lot of detail: the pleasant change to the rules of the 529 college savings accounts, the $10,000 limit on state and local taxes and the not so pleasant change in the deductible amounts for mortgage interest.
Education Savings Accounts. Previously, we referred to 529 accounts as “College Savings Accounts.” Now we may have to refer to them as simply “Education Savings Accounts.” The new law provides tax-deductible contributions to these accounts and they can now be utilized for private school tuition for primary and secondary education (K-12) costs up to $10,000/yr. per child. In Alabama contributions are deductible up to $5,000 for a single tax payer and $10,000 for a married couple. Contributions of up to $15,000 per year are within gift tax limitations. There is a way to “super fund” a 529 account of up to $75,000 in one year but there are important details we don’t have room to detail here. In Alabama, an individual beneficiary of a 529 account may have up to $400,000 in their account for tax advantage payment of education expenses.
Limit on State, Local Taxes. Probably the most talked about provision of the new law is the limitation of deductibility of only $10,000 of state and local taxes from one’s taxable income. Under the Alabama Accountability Act (AAA), taxpayers have the opportunity to receive a tax credit for up to half of their state tax liability (capped at $50,000). This is accomplished by gifting money to a Scholarship Granting Organization (SGO) which then distributes the funds to non-public schools throughout the state.
The benefit for applying for a credit under the AAA program is that on your Federal return, the amount paid for AAA is a charitable deduction instead of a state tax deduction. Unlike the state tax deduction, charitable deductions generally are not limited and are fully deductible. Additionally, since any amount you contribute reduces your state tax liability, you may consider reducing your planned state withholding or estimated tax payments by the same amount. Obviously, this is a fairly complicated strategy and should only be considered in conjunction with advice from your tax accountant.
Mortgage Deductibility. The new law lowers the mortgage deductibility limit from a $1.0 million-dollar loan amount down to $750,000. In our market, for most of us, this is not quite a big deal. The bigger situation is that in 2018, interest for a non-purchase money equity line of credit will not be deductible as it has been. And second/vacation mortgage loans won’t be deductible at all. The good news is these provisions apply to new loans taken out after January 1, 2018.
The new law is quite complicated and is subject to changes and reinterpretations. So, it is very important to seek trusted counsel from your tax accountant and financial advisor before acting on any of these ideas.
Vision Financial Group
4505 Pine Tree Circle, Birmingham, AL 35243
Advisory services offered through Investment Advisors, a Registered Investment Advisor and a division of ProEquities, Inc. Securities are offered through ProEquities, Inc., a Registered Broker Dealer and Member FINRA & SIPC. Vision Financial Group and West Alabama Bank are Independent of ProEquities, Inc. Securities and insurance products offered are not bank deposits, have no guarantee, are not FDIC insured and may lose value.