Own a Home? A Must Read on How the New Tax Bill Will Impact You

Community Manager
Community Manager
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11 Comments (11 New)

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You are a homeowner, and you pay taxes. But if you find yourself absentmindedly nodding along when someone mentions terms like the standard deduction, itemizing and mortgage interest deduction, you’re probably more confused than ever about how the new tax bill (a.k.a. Tax Cuts and Jobs Act) will impact you as a homeowner. If so, we’re here to help.

  

Before we get started, it’s important to note that each individual’s tax situation is different. Consult a qualified tax professional before making any tax moves.  Take note that the new laws likely won’t affect your 2017 return, which most people are filing before April this year.  Also, while many of the provisions in the new legislation are permanent, many will expire after 2025. If you’re looking for a general review of the new tax bill and how it may impact other aspects of your finances, check out our overview on the new tax bill article.

 

Do you itemize? 

 

When you do your taxes, you likely either take the standard deduction or itemize. Itemizing means that you list “item by item” things you may deduct from your income to determine the amount you’ll pay taxes on. The standard deduction simplifies taxes somewhat by assigning a “standard” amount to deduct from your income, regardless of deductions like charitable giving, student loan interest paid or mortgage loan interest.  Previously, choosing to itemize only made sense if all of your “qualifying” deductions yielded more tax savings than taking the standard deduction.

 

Why does this matter?

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For more home advice and guidance, please visit our Home Learning Center.

 

The new tax bill nearly doubles the standard deduction, from $6,350 to $12,000 for individuals, and from $12,700 to $24,000 for married people filing jointly. Previously about 28% of taxpayers itemized, according to a study by Urban Brookings Tax Policy Center, but with the tax law change, it is likely that more people will opt for the simplified standard deduction. 

 

So what about the housing deduction?

                        

Under the old tax rules, taxpayers often chose to itemize because they could deduct their mortgage interest. Now, with a higher ceiling due to the increased standard deduction, fewer people may “use” the mortgage deduction.    

 

If homeowners continue to itemize, there are two notable changes:

 

  1. Deductible mortgage interest for new purchases is capped at $750,000 on a qualified residence, down from $1 million. To deduct, the debt must be used to acquire, build or substantially improve a primary residence. Existing mortgages as of Dec. 15, 2017, are “grandfathered” in at the $1 million limit.

 

  1. Debt for anything other than acquiring a residence (such as using a home equity loan to consolidate credit card debt) is no longer deductible in 2018, where last year it was deductible up to $100,000.

 

For example, let’s say the Smith family owes $100,000 on a home worth $200,000. They decide to refinance to a new 30-year, fixed mortgage, and they borrow $120,000 on a “cash-out” refinance, using $20,000 to buy a new car. Interest on $100,000 of the loan may be deductible, but the interest on the $20,000 is not.

 

An important distinction is that this “acquisition indebtedness,” which is still deductible in 2018, is not based on the type of loan but on how the funds were actually used. Tax forms from your lender don’t reflect how the funds are actually used, so it’s the taxpayer’s responsibility to keep track if they are trying to deduct it from their taxes.

 

Here’s another example: The Jones family takes out a home equity line of credit on their existing home to build a new bedroom addition. Since this is a “substantial improvement” to their home, the interest may be deductible. If they used the funds to pay off credit card debt, it would not be deductible.

 

All this adds up discussing your specific tax situation with a qualified tax professional, particularly if you are looking to use a home equity loan or refinance for uses other than buying, building or substantially upgrading your property.

 

For more Home advice and guidance for both seasoned and first time homeowners, please visit our Home Learning Center

 

The contents of this document are not intended to be, and are not, legal or tax advice. The applicable tax law is complex, the penalties for non-compliance are severe, and the applicable tax law of your state may differ from federal tax law.  Therefore, you should consult your tax and legal advisors regarding your specific situation.

 

DID# 249429-0218

11 Comments
Tamed4u
Occasional Visitor

It will be wise to ask for IRS help when having to file for the first time, after the death of a spouse.

Community Manager
Community Manager

Thanks for the question, and condolences to you and your family.  It is best to check with a qualified tax professional, especially when navigating the death of a spouse.

Norm G
Contributor

"Deductible mortgage interest for new purchases is capped at $750,000 on a qualified residence"  isn't quite right.  The amount of the loan you can deduct interest on is to be capped at $750,000, not the interest itself.

TomP
Occasional Visitor

Tamed4U, I'm not sure but I don't believe that the IRS will help you do taxes any more. I thought I something the last 2 days or so saying that they no longer do that. However, I would suggest that if anybody wants free help with their taxes that they contact AARP and find out if their Tax-Aide program has a branch near them. They provide free tax preparation (both federal and state) that includes E-filing and this is their 50th year of providing that free service. Their preparers go through training every year and you don't have to be an AARP member to have your taxes done. In fact, you don't even have to be a senior to take advantage of the program. Their are some limitations to what they can do but most things are within their scope.

 

Tom

Cambrian
Occasional Visitor

When a mortgagee pays off all or a portion of a reverse mortgage principle, a portion of the payoff is interest paid. Is this deductible? Or is it considered a withdrawal from an equity line?

Community Manager
Community Manager

Hi Norm G,

 

Thank you for your comment and for helping clarify the intent.

 

Mikel

Community Manager
Community Manager

Cambrian,

 

Thanks for the question!  I found the following resource to you that might be helpful.

https://www.irs.gov/faqs/other/for-senior-taxpayers/for-senior-taxpayers

 

The payments made to you during the reverse mortgage are considered loan proceeds, not income.  As you asked, when you repay the loan, part of that repayment consists of interest and treated similarly to other home equity debt. 

 

Here’s what the IRS site says about the interest payment deductibility.

  • Also, interest (including original issue discount) accrued on a reverse mortgage isn't deductible until you actually pay it (usually when you pay off the loan in full). A deduction for interest paid on a reverse mortgage loan may be subject to the limit on home equity debt discussed in Part II of Publication 936,

Make sure you check with a qualified tax professional regarding your specific situation to be sure.  Thanks!

Regular Contributor

The title is a bit of a misnomer. It should say "Have a mortgage? A must read..."

 

The article omits another significant itemized deduction for homeowners: property taxes. In fact, if you "own" your home outright, you won't pay any mortgage interest, but you'll still pay property taxes. And that limit has also been capped.

 

From USAA's linked article: "State and local taxes — Individuals are only able to claim an itemized deduction of up to $10,000 ($5,000 if married filing a separate return) for state and local property taxes and state and local income taxes (or sales taxes in lieu of income)."

 

You may want to include a discussion of SALT, if you're going to talk about the tax implications of home ownership. Like here: https://www.cpajournal.com/2018/01/22/congress-salt-deduction/

 

 

Community Manager
Community Manager

Puzzled,

 

Thanks for the input!  True that if a person owns their home outright, they’ll won’t be deducting interest they aren’t paying! Also a good point as well on the need to discuss State and Local Taxes implications.  If you want to read more on that topic, I’ll point you to an additional resource a colleague of mine wrote as part of the series on the new law. Do the New Changes to SALT Affect Your Taxes?

 

Thanks again for your additions!

knotsandanchors
New Member

My husband and I own a fishing charter business as sole proprietors. We used our Home Equity Line of Credit to purchase a new boat for our business. Since this was not "personal expenses" will we still be able to deduct the interest as a business expwnse? Called the IRS and they were no help on this. Told me they were "not at liberty to answer any questions relating to 2018 taxes or the new tax law." Your help on this would be greatly appreciated.