The new tax law: how it affects homeowners.

Homeowners will see a number of key changes take effect in the very near future. If you own property, here’s what you can expect:

Increased standard deduction: The standard deduction would nearly double, to $12,000 for single filers and $24,000 for joint filers. 
(If you have a fairly small mortgage, you’ll likely now be using the standard deduction rather than Itemizing on Schedule A.)

Mortgage interest deduction: Assuming the new mortgage is obtained after 1/1/2018, the deduction is limited to the interest on the first $750k of loan amount, down from the current cap of $1 million. Existing mortgages can still deduct up interest on the first $1 million. This new limit will also apply to second homes. BUT you will not be able to deduct interest on a new HELOC (home equity line of credit). Remember, the value of a tax deduction lies in your effective tax rate. The higher your rate, the more valuable the deduction.

State and local tax deduction: Taxpayers will be allowed to deduct up to $10,000 in a combination of property tax and income tax (or sales tax). This impacts about 4 million whose taxes now exceed that $10k limit.

Capital gains exclusion for the profit from sale of a primary residence sale: This deduction will stay the same; you can exclude the first $250,000 of profit ($500,000 if married) if you’ve lived there two of the past five years; and the 1031 like-kind exchange for real property capital gains deferral will also not change .

New individual tax rates: There will be seven individual brackets at 10%, 12%, 22%, 24%, 32%, 35% and 37%. The new 37% top rate will apply to taxable income in excess of $500,000 for single filers and $600,000 for joint filers.

Here are some other changes in the new law:

Increased child tax credit: The per-child tax credit will double from $1,000 to $2,000.

Increased exemption for Alternative Minimum Tax (AMT): The AMT will be retained for individuals, but the exemption and phase-out amounts have sharply increased.

No changes to capital gains and dividends: Capital gains & qualified dividends will continue to be taxed at the current 0%, 15% & 20% rates, depending on income. Wealthier filers will continue to pay an additional 3.8% tax on investment income (Net Investment Income Tax).

Estate tax exemption is  doubled: Estates of up to $11 million (or $22 million for couples) will be exempt fromtaxation.

Some other deductions and tax credits are repealed: including deductions for tax preparation, moving expenses and alimony payments, among others.

The individual mandate that individuals purchase health insurance or pay a penalty is repealed beginning in 2019.

Deduction for medical expenses will be the same: Medical expenses above 7.5% of adjusted gross income will be deductible in 2017 and 2018, rising to 10% in 2019.

No changes to cost-basis rules: Investors will continue to have the ability to choose which lots of stock they are selling. (no requirement for FIFO method)

Expansion of 529 college savings accounts: Up to $10,000 per year of money in a 529 college savings plan can be used to pay for K-12 school tuition or homeschooling.

No major changes to retirement savings accounts: Contribution limits to IRAs, Roth IRAs, 401(k)s and other retirement plans were not changed.

Reduction in taxes for “pass-through” businesses: The bill significantly reduces the effective rate of tax on business income earned by independent contractors and income received from pass-through entities.

Important summary for homeowners:

The mortgage interest deduction will be limited to $750,000 loans
Interest on home equity loans will no longer be deductible
The property tax deduction will be capped at $10,000

Leave a Reply

Your email address will not be published. Required fields are marked *