A motivating factor in becoming a homeowner was always the mortgage interest deduction. Lowering your tax liability made it more affordable to own a home. However, the tax reform, called the Tax Cuts and Jobs Act recently passed may change this way of thinking.
Right now, homeowners can deduct mortgage interest on any mortgage debt up to $1 million. The Tax Cuts and Jobs Act has set to change this, though. According to Zillow’s research, this could lower the number of homeowners that benefit from the deduction from 44% to just 14%. Keep reading to see how you may be affected by this new bill.
Mortgage Interest Deduction
The largest hit area as a result of the tax reform is the mortgage interest deduction. The $1 million mortgage debt cap has been lowered to $750,000. This pertains to mortgages taken out after December 14, 2017, though. Any loans taken out prior to that date that don’t exceed $1 million aren’t affected.
Perhaps more notably, is the inability to write-off home equity interest. The only exception to the rule is if you used the funds to improve your home. However, they state ‘substantially improve the home.’ It might be subject to certain restrictive conditions in order for you to deduct this interest.
Luckily, mortgage interest on second or investment homes is still allowed but with the same $750,000 limits for mortgages taken out after 12/14/17.
Property Taxes and Deductions
Unfortunately, it isn’t just mortgage interest that is affected by the tax reform.
Homeowners can still deduct their property taxes, which is often a large chunk of their annual bills. The tax reform allows property tax deductions up to $10,000. However, this is in combination with any claimed state and local income taxes.
The Standard Deduction Explained
While it sounds frustrating to have the caps lowered on what you can claim as a homeowner, there is some good news out of the tax reform. The standard deduction was increased from $6,350 for singles to $12,000. For married couples, it increased from $12,700 to $24,000.
The standard deduction is the IRS’s way of giving us a little money back. They understand it costs money to live, so they aren’t out to tax us to death. The standard deduction helps to lower your adjusted gross income so that you owe less at tax time.
Since the standard deduction increased so much, it lessens the pain of losing some capability to write off mortgage interest. In many cases, Americans will just qualify for the standard deduction, making filing taxes even easier than when they had to itemize.
Which Will You Choose?
It’s up in the air at this point regarding which consumers will do best with the standard deduction and which can still make out by deducting mortgage interest as an itemized deduction.
As a best guess, homeowners in certain high-cost areas, such as Washington D.C. and certain areas of California will benefit from writing off their mortgage interest plus property taxes to get a higher deduction.
It will take some time for us to judge how we all fare with the new tax laws. It’s supposed to help us lower our tax liability and come out ahead. Will that actually happen or will we miss our old itemized deductions? The only way to tell is after we file our taxes for the year 2018.