5. Home equity loan deductions
The deductibility of interest on home equity loans and lines of credit (HELOCs) is a big area of confusion, said Tim Steffen, director of advanced planning for Baird Private Wealth Management. The new tax law lowered the amount on which interest expense on so-called “acquisition indebtedness” could be deducted -- from $1 million to $750,000 for new loans made after Dec. 14, 2017. It also eliminated the interest deduction on loans that are not used to ‘buy, build or substantially improve’ a home, he said.
“Sometimes people buying a home don’t have money for the down payment, so take out a loan for 80 percent of the price and a home equity loan out for 20 percent,” said Steffen. “Because the home equity loan was used to buy a house it’s still considered deductible.” Going forward, though, if you take out a HELOC and use some of the money to buy a car, you cannot deduct that interest. If you use the money to put an addition on your home, however, that may still be deductible.
6. New college savings plan uses
The new tax law expands the allowable use of tax-exempt 529 college savings plans for education costs that accrue while your child is between kindergarten and high school graduation. But while some states automatically follow the federal code, others choose to decouple from certain parts of it. So while the U.S. government may say you can use 529 money for K-12 expenses, a state may consider such a withdrawal a non-qualified distribution and could charge you penalties, said Steffen. So be careful.