2018 is in full swing, along with a newly enacted tax policy referred to as The Tax Cuts and Jobs Act.
While many of the tax reform changes don’t have any immediate impact, the new act is predicted to affect countless businesses and tax payers down the line — it could even bring a whole new set of challenges for current and aspiring homeowners.
If you own a home, or plan to, how will this affect you, you may be wondering.
To help you out, we’ll go over a few of the notable 2018 tax reform changes and how they could potentially impact homeowners and homebuyers.
1. A Lower Cap on Deductible Mortgage Interest
The Tax Cuts and Jobs Act lowers the limit for the mortgage interest rate deduction for new loans (loans started after December 15, 2017) to $750,000. Any loans taken out prior to that date have been grandfathered into the previous tax policy, which offered homeowners a $1 million deduction limit.
Will this lower cap affect you as a homeowner/homebuyer?
The median home price across the country is sitting at around $250,000, so there’s a good chance you won’t be affected. While this new change makes it more challenging for buyers looking to purchase more expensive homes, only about 1.3% of all U.S mortgages will actually be impacted by this new deduction cap.
2. Increased Standard Deduction
Taxpayers are able to lower their taxable income with the help of larger standard deductions. Prior to the new tax reform bill, a single person could claim a $6,350 standard exemption and an additional $4,050 personal exemption.
How will this change affect you?
Under the new tax laws, the standard deduction has nearly doubled to $12,000 ($24,000 if filing jointly with a spouse), while the personal exemption deduction was completely removed. However, because tax payers choose between taking a standard deduction (now nearly doubled) or itemizing their deductions using a Schedule A Tax Form, taxpayers have more incentive to choose the standard deduction.
3. Eliminated Home Equity Interest Deduction
Home equity lines of credit (HELOC) have been a great way for homeowners to borrow money using their home’s equity. In addition, prior to the new tax reform changes, homeowners could deduct interest paid on home equity loans from their taxes. With the new tax act, homeowners may no longer be able to deduct the interest paid on home equity loans. The exception, however, is if the loans are used to improve your home or purchase another one.
How does this tax change affect you?
As a homeowner, this new tax change will give you one less deduction to itemize if the loan is used for personal expenses instead of re-investing it back into your home’s value. However, with the nearly doubled standard deduction, many homeowners will be less incentivized to itemize this deduction anyway.
Note: While the ability to deduct interest on home equity loans (not used for home improvement/purchase) has been eliminated, home equity is still an affordable and effective way to borrow money.
4. New Limit on State and Local Property Taxes
Prior to the signing of the Tax Cuts and Jobs Act, tax payers could deduct their state income, sales and property taxes without any limit. Under the new tax laws, state and local property tax deductions are capped at $10,000.
How will this new deduction limit affect you?
With this new cap limit, you will no longer be able to fully deduct state and local property taxes, as well as income or sales taxes. So, if you itemize deductions and reside in a state where local tax liability exceeds $10,000, you may end up receiving a smaller tax break.
The Bottom Line
Whether you’re a homeowner or potential homebuyer, we understand you probably have questions about how the new tax reform laws will affect you. While we aren’t tax advisors, as a mortgage lending company with over 30 years of experience, we do understand how the new tax system will affect our business partners and customers.
In the end, buying and owning a home has its own set of advantages and rewards that are unaffected by the recent tax reform changes. Each homeowner and homebuyer has their own unique situation, but we’re here to help evaluate your options so you can find a mortgage that fits your needs. If you have any questions regarding your personal situation, feel free to connect with a PrimeLending mortgage professional at the McMullen Group.
PrimeLending is not authorized to give tax advice. Please consult your tax adviser for tax advice for your specific situation.