Tax Deductions for Homeowners: How the New Tax Law Affects Mortgage Interest
Tax season is upon us once again, and to make it even more interesting this year, the tax code has changed — along with the rules about tax deductions for homeowners. The biggest change? Many homeowners who used to write off their property taxes and the interest they pay their mortgage will no longer be able to.
Stay calm. This doesn't automatically mean your taxes are going up. Here's a roundup of the rules that will affect homeowners — and how big of a change to expect.
Standard Deduction: Big Change
The standard deduction, that amount everyone gets, whether they have actual deductions or not, nearly doubled under the new law. It's now $24,000 for married, joint-filing couples (up from $13,000). It's $18,000 for heads of household (up from $9,550). And $12,000 for singles (up from $6,500).
Many more people will now get a better deal taking the standard than they would with their itemizable write-offs.
For perspective, the number of homeowners who will be able to deduct their mortgage interest under the new rules will fall from around 32 million to about 14 million, the federal government says. That's about a 56% drop.
So will you be able to itemize, or will you be in standard deduction land?
For standard deduction, you'll be pleased to know that tax forms are easier when you don't itemize.
Personal Exemption Repealed
One caveat to the increase in the standard deduction for homeowners and non-homeowners is that the personal exemption was repealed. No longer can you exempt from your income $4,150 for each member of your household. And that might temper the benefit of a higher standard deduction, depending on your particular situation.
For example, a single person might still come out ahead. Her $5,500 increase in the standard deduction is more than the $4,150 lost by the personal exemption repeal.
But consider a family of four with two kids over 16 in the 22% tax bracket. They no longer have personal exemptions totaling $16,600. Although the increase in the standard deduction is worth $2,420 (11,000 x 22%), the loss of the exemptions would cost them an extra $3,652 (16,600 x 22%). So they lose $1,232 (3,652 – 2,420).
But say their two kids are under 16, giving them a child credit worth $2,000. That offsets the loss resulting in a $758 tax cut.
The takeaway: Your household composition will probably affect your tax status.
Mortgage Interest Deduction: Incremental Change
The new law caps the mortgage interest you can write off at loan amounts of no more than $750,000. However, if your loan was in place by Dec. 14, 2017, the loan is grandfathered, and the old $1 million maximum amount still applies. Since most people don't have a mortgage larger than $750,000, they won't be affected by the cap.
But if you live in a pricey location, or you just have a seriously expensive house, the new federal tax laws mean you're not going to be able to write off interest paid on debt over the $750,000 cap.
Rental Property Deduction: No Change
The news is happier if you're a landlord. There continue to be no limits on the amount of mortgage debt interest or state and local taxes you can write off on rental property. And you can keep writing off operating expenses like depreciation, insurance, lawn care, and utilities on Schedule E.
Home Equity Loans: Big Change
You can continue to write off the interest on a home equity or second mortgage loan (if you itemize), but only if you used the proceeds to substantially better your home and only if the total, combined with your first mortgage, doesn't go over the $750,000 cap ($1 million for loans in existence on Dec. 15, 2017). If you used the equity loan to pay medical expenses, take a cruise, or anything other than home improvements, that interest is no longer tax deductible.
Here's a big FYI: The new rules don't grandfather in old home equity loans if the proceeds were used for something other than substantial home improvement. If you took one out five years ago to, say, pay your child's college tuition, you have to stop writing off that interest.
4 Tips for Navigating the New Tax Law
1. Single people may get more tax benefits from buying a house. They can often reach [and potentially exceed] the standard deduction more quickly.
2. Student loan debt is deductible, up to $2,500 if you're repaying, whether you itemize or not.
3. Charitable deductions and some medical expenses remain itemizable. If you're generous or have had a big year for medical bills, these, added to your mortgage interest, may be enough to bump you over the standard deduction hump and into the write-off zone.
4. If your mortgage is over the $750,000 cap, pay it down faster so you don't eat the interest. You can add a little to the principal each month, or make a 13th payment each year.
Written by: Leanne Potts on HouseLogic