In case you forgot about the sweeping income tax changes passed by Congress last fall and took effect December 15 of last year, you probably were reminded when you filed your 2017 taxes. The new changes didn’t affect any filing for last year’s taxes but in 2018 and going forward there were some rather significant changes. Not since the Reagan Tax Cuts of 1992 has the federal tax code changed in so many ways.
First, tax rates for most every income tax bracket were lowered. Ranging from 10% for the lowest of income earners to 37% for the higher earners making more than $500,000 per year. The standard deduction for individual filers increases to $18,000 and nearly doubles for married couples filing jointly along with surviving spouses. There are other categories that were adjusted for 2018 and going forward ranging from adjustments to the Alternative Minimum Tax, or AMT, student loan interest deductions and child care tax credit among others. But if you’re a homeowner in 2018 or plan to be, there are some changes you’ll want to be aware of.
Prior to 1992 there were many more eligible deductions than there are today. For example, credit card interest was tax deductible as well as interest on other types of loans. Tax laws were changed that compressed income tax brackets while at the same time lowering tax rates. But the mortgage interest deduction survived the cut and for tax payers who itemize their deductions the mortgage interest deduction is both the most common and the most valuable.
The thinking behind keeping the mortgage interest deduction helps spur home ownership but in reality someone doesn’t buy and finance a home because interest is deductible while monthly rent is not. Still, it does have an impact. When a home is sold typically another one is bought. During the sale there are commissions paid to real estate agents, an appraiser makes money and so too are multiple third party service providers that earn income each time a home is sold.
For all mortgage interest paid in 2018, it’s deductible for both single filers and those married filing jointly. For married couples, interest can be deducted on mortgage loans up to $750,000. This is a big change in 2018 as the prior loan limit was at $1 million. Yet it’s a big change for a smaller group of home owners as the median home value across the United States is somewhere closer to $250,000. Note, these changes are not retroactive to any existing mortgages that were taken out prior to December 15, 2017. It’s only for loans originated from that point forward.
Another big change for 2018 relates to a home equity line of credit. A HELOC is a convenient way for homeowners to borrow money when needed with a low interest line of credit. Home owners can borrow needed funds and use them for any purpose whatsoever and because HELOC interest is mortgage interest, it’s tax deductible. However, the new tax law states that only equity loans used to repair, remodel or upgrade a home has tax deductible interest. Funds withdrawn from a HELOC and used to pay for a family vacation cannot be deducted any longer. HELOC interest deductions are eliminated and only an equity loan used to improve the property can qualify. Instead of a line of credit, the loan is issued in a lump sum.
Property taxes are also a popular deduction, especially in high property tax states such as California, Texas and New York for example. Property taxes also made the cut and can still be listed as a deduction but the deduction is limited to $10,000 per year. Again, most homeowners won’t be affected if the states where the property is located because property taxes are primarily based upon the assessed value of the home. Higher values in turn yield higher property taxes.
Okay, let’s put in our disclaimer here. This article is not to be construed as tax advice. For income tax advice you should seek the services of a tax professional or your Certified Public Accountant.
For those that file on their own using an online tax preparation app the new changes will be embedded in the new software and they’ll answer questions as they do now to complete and file their tax returns. For those buying on the higher end or plan on taking out a HELOC this year, they’ll notice the changes about one year from now.