Julie Molloy's Blog
Thinking of cashing in on income-tax savings now that you're a homeowner? With new tax laws in place for tax-year 2018, new homeowners might not receive what they expect. The Tax Cuts and Jobs Act (TCJA) that went into effect for tax years 2018 through 2025 changed up some of the write-offs homeowners typically expect.
Homes purchased after January 1, 2018, through December 31, 2025 qualify for an itemized deduction for interest on a mortgage up to $750,000 used to improve or acquire a new home that you live in, or $375,000 each if your file married but separate. That is lower than the previous law that allowed for $1 million and $500,000 respectively. Additionally, you used to be able to deduct interest on home-equity debt up to $100,000 ($50,000 each if married filing separate) that no longer is deductible at all.
Limits for deductions for state and local taxes are just $10,000 combined or $5,000 separate. If you live in a high-property-tax state, you’ll likely see a change in your refund due to this change.
A significant difference you'll see, to nearly everyone's advantage, it the increase in the standard deduction. A standard deduction does not require any "deductions" to claim it other than that you exist as a potential tax-payer. These new amounts are $24,400 for married filing joint couples and $18,350 for heads of household. If you file separately or as a single, your deduction is $12,400 just for being you.
This means though that if you relied on itemized deductions to decrease your taxes due, they won't count unless they are in excess of your higher standard deduction. The rest does not actually provide an income tax reduction benefit. So careful itemization (interest, property taxes, gifts to charity) to push you over that $24,400 threshold is where you’ll see some benefit.
When calculating your write-offs, be aware that the percent reduction is only for the amount you make above the $24,400 (or $12,400 for singles), not for your entire income. So if you’re deductions amount to $36,000 and you’re in the 24-percent bracket, your increase bottom line is only 24% of $11,600, ($36,000 minus $24,400) or $2784, not $8,640.
While homeownership still is a great deal for many buyers, the tax deductions for smaller mortgages may not add up to what long-time homeowners may still believe. If you have questions about how your home purchase impacts your taxes, talk to your real estate professional.