The Tax Cuts and Jobs Act included sweeping tax changes that will affect most Americans in one way or another. For homeowners, the law—which went into effect January 1, 2018—may impact key tax incentives that have helped to support the benefits of owning a home.
Following are highlights of the law for homeowners to consider as they plan for tax season.
Three Deduction Changes
Generally, the law affects three itemized deductions associated with home ownership.
The new law caps the amount of mortgage debt from which homeowners can deduct the interest paid at $750,000, down from $1 million. This limit applies to loans taken out on or after December 15, 2017. Loans made prior to that date are grandfathered in at the higher loan amount.
While this change is significant, it's important to keep it in perspective. With the average U.S. mortgage balance at about $200,000, most homeowners will not be affected.
Prior to the new rules, amounts paid in property taxes could be deducted in full, along with either state income taxes or sales taxes (but not both). Now this “bundle” of deductions will be capped at $10,000. The new rule will most likely have a greater impact on residents of states with high income and property taxes, such as New York, New Jersey, and California.
Home Equity (loans and lines of credit)
The new law also eliminates the ability to deduct interest on home equity loans and lines of credit unless they are used to “buy, build, or substantially improve the taxpayer’s home that secures the loan.” The IRS asserts that this statement leaves leeway for homeowners to continue to claim the deduction as long as the loan is not used for reasons other than home improvement, such as paying down credit card debt.
Notably, one housing-related rule that remains unchanged is the home sale exclusion. This rule allows taxpayers to exclude from their taxes up to $250,000 ($500,000 if married filing a joint tax return) in gains from the sale of a home as long as they have owned and used the dwelling as a primary residence for two of the past five years.
The Standard Deduction—A Game Changer
Perhaps the part of the law that has the most far-reaching implications is the near doubling of the standard deduction. Here’s a snapshot of the changes in store for tax year 2018:
|2017 Tax Year||2018 Tax Year|
|$12,700—Married filing jointly; surviving spouse||$24,000—Married filing jointly; surviving spouse|
|$9,350—Head of household||$18,000—Head of household|
|$6,350—Single filer||$12,000—Single filer|
Source: Internal Revenue Service.
For most taxpayers, homeowners included, the increased standard deduction, coupled with the limits imposed on many go-to deductions, make itemizing a less attractive option.
Under the previous law, a married couple would have claimed $15,000 in itemized deductions. Now, under the new law, they can claim the standard deduction of $24,000, which allows them to take an additional $9,000 off their income while simplifying the paperwork involved in filing their taxes.
According to the Tax Foundation, it is estimated that the number of taxpayers itemizing deductions will decline from the 46.5 million that did when filing their 2017 taxes to about 18 million in 2018. Going forward, it is predicted that 88% of taxpayers will opt for the standard deduction.
Changes Bring Choices
Come tax time, choosing between the standard deduction and itemizing popular tax breaks such as mortgage interest and property taxes should be a numbers-based calculation. What is the total of your deductible expenses for 2018? If you are single, is that sum more than $12,000? If married filing jointly, is it more than $24,000? If the numbers are close, should you consider simplifying tax filing and/or saving on tax preparation fees by choosing the standard deduction? For help with this or other tax-related decisions, consider getting help from a qualified tax professional.
Many of the provisions of the Tax Cuts and Jobs Act affecting individual taxpayers, including those mentioned here, are currently set to expire on December 31, 2025, unless Congress acts to extend them.