On December 22, 2017, President Trump signed into law the Tax Cuts and Jobs Act. It amounts to a major rewrite of several provisions of the individual and corporate tax code.
There are several big changes with the new tax bill, and there’s been a ton of analysis around the benefits and downsides of those changes, but we wanted to focus on what it means for current homeowners and those in the market to buy a home in the near future.
There’s going to be a big, bold disclaimer at the bottom of this article because it makes our lawyers (and by extension, me) more comfortable, but before we go any further together, I want to make one point as clearly as possible: While this article lays out several facts about provisions in the new tax law, it is not tax advice. Everyone’s finances are different, and if you’re looking for tax advice, feel free to contact a financial advisor, accountant or other tax preparation professional.
With that out of the way, let’s dive in. All the changes in the tax bill that was just passed took effect on January 1, 2018. This means you won’t have to worry about them until you file your 2018 tax return next year.
However, the calendar turning over does mean that we’ve now entered 2017 tax season. With that in mind, there’s one tax change you should know about for your current 2017 taxes that’s gone under the radar in the midst of all the coverage surrounding the updated tax bill just signed by the president. Let’s briefly touch on that first.
Elimination of Mortgage Insurance Deduction for 2017
Every year, homeowners who have a mortgage receive Form 1098, also referred to as the Mortgage Interest Statement. The mortgage company is required to send you and the IRS this form, which shows how much mortgage interest was paid in a given tax year. If you paid more than $600 in mortgage interest, the interest is fully deductible in most cases.
In the new tax bill for 2018, mortgage interest will still be fully deductible in many cases (subject to new restrictions and limits that we’ll get into below). However, there is an important change that occurred in 2017 for your mortgage insurance deductions that will affect your taxes this year.
Private mortgage insurance payments on conventional loans and mortgage insurance premiums charged on FHA and USDA loans were previously considered tax deductible under the mortgage interest provision. Earlier in 2017, Congress decided not to renew that provision for the 2017 tax year. This means that mortgage insurance payments are no longer deductible, beginning with your 2017 return. So while you may continue to account for your interest deductions, insurance payments will no longer be included.
Let’s take a look at how the new tax law will affect homeowners going forward from the date your current tax bills are due (hint: They’re due Tuesday, April 17, 2018).
Unpacking the New Tax Law
Before we get into what’s changing in the new tax code, we should note that while the portions applying to corporations are permanent, all the items pertaining to individuals, which is what we’re interested in here, have a seven-year lifespan. Those items went into effect on January 1, 2018, and expire at the end of 2025. If the amended portions haven’t been renewed before then, the tax law reverts back to what it was before the amendments.
Here’s what the new law changes regarding taxes and your home.
Increased Standard Deduction
One of the major features of the new tax bill is an increased standard deduction. Although not strictly related to homeownership, it may affect whether you take homeownership deductions that only apply if you itemize your taxes.
Under the new tax law, the standard deduction is $12,000 if you’re single and $24,000 if you’re married and filing a joint return. You can also get $2,000 in tax credits for each child you have and up to $500 for non-child dependents.
This standard deduction is increasing, but personal exemptions that many used to qualify for are going away. Whether you’re a single filer or filing jointly, the increase in the standard deduction will more than cover the size of the old standard deduction, even with all the exemptions you could take. However, there are no more exemptions to add to your standard deduction.
The following deduction changes are specific to homeownership if you choose not to take the standard deduction.
Property Tax Changes
Under the former tax law, you could take full deductions for every dollar of your local, state and property taxes.
In 2018 and going forward, your state, local and real estate taxes are put into one pool for deductibility purposes. Between the three of them, you only can deduct up to a limit of $10,000 total.
Mortgage Interest Deduction Changes
In addition to the mortgage insurance deduction change in effect for the 2017 tax year mentioned above, the tax bill makes several important changes to the mortgage interest deduction provision of the tax code in 2018 and going forward.
Starting in 2018, you’ll be able to deduct mortgage interest on qualifying residences (primary and vacation homes) with total mortgage amounts up to $750,000 for joint filers ($375,000 if married and filing separately). This does mean that if you’re a new homeowner buying a home that’s more on the expensive side, you won’t be able to deduct your full interest amount.
If you closed on the loan for your home before December 15, 2017, you’re grandfathered in under the old limits, which is $1 million for joint filers ($500,000, if married and filing separately).
You used to be able to deduct up to $100,000 worth of interest for a home equity loan taken out in order to do something other than buy , build or improve your home. You could take this deduction if you borrowed from your home equity in order to give a college or retirement fund a boost, for example. As of January 1, 2018, this type of home equity deduction no longer exists. If you have any doubts as to whether your mortgage interest qualifies under the new rules, seek the advice of a tax professional.
Under the former tax law, there was a limited ability to deduct moving expenses when the relocation was work-related. Starting this year, this only applies to active-duty members of the armed forces.
Those are the big changes in the new tax law that are impacting homeowners. Here’s more information on this year’s 1098 mortgage insurance deduction elimination.
*Please note that none of this information shall be construed as tax advice. If you’re seeking tax assistance, please reach out to your tax professional or the IRS.
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