The new tax law was supposed to make filing taxes easier. For homeowners with home equity loans, property taxes or mortgage interest, it may be more complicated.
As 2018 taxes come due on April 15, homeowners will find that the tax benefits of owning a home and paying down a mortgage still exist, but only up to new limits that have been set by the tax law. Some people will get more of a tax break by taking a standard tax deduction, meaning they won’t have to itemize their deductions for home ownership or for other reasons.
Two big tax breaks for homeowners were trimmed, leaving many tax filers to no longer have to itemize their tax deductions if they can get a bigger tax break by taking the standard deduction.
Here’s a breakdown of tax benefits for homeowners under the Tax Cuts and Jobs Act, or TCJA:
Mortgage interest deductions
If you itemize, you can deduct interest on the first $750,000 in mortgage loans taken out after Dec. 15, 2017. This is valid for first and second homes combined. It’s the biggest tax break for most homeowners.
Older loans are grandfathered, generally allowing interest on up to $1 million in mortgage debt on loans taken out on or before Dec. 15, 2017, to be deducted.
Single taxpayers or those who are married but are filing separately can deduct the interest on up to $375,000 of mortgage debt under the new rules.
The game-changer, however, is that many homeowners will see a higher tax break by taking the standard deduction, which has doubled to $24,000 for married taxpayers filing jointly. For single filers it’s $12,000, almost double what it was in 2017. So unless your mortgage interest and other itemized deductions total at least that much you're better off just taking the standard deduction.
For homeowners with a mortgage around $300,000 or less, it will probably make more sense to take the standard deduction, says Bryan Gray, a certified public accountant and certified financial planner in Clifton Springs, NY.
“I think it’s a little bit easier from the tax preparation standpoint,” Gray said of getting a better tax break from the standard deduction for many homeowners.
For people with $1 million or more in mortgages and with high incomes, Gray says he recommends going “large and long” on their mortgage, taking a 30-year mortgage instead of a shorter term loan.
“Rates are still reasonable in historic perspectives, the yield curve is incredibly flat, so the benefit of 15-year versus 30-year is minimal and their after-tax effective interest rate is oftentimes less than 2.5 percent,” he says.
For people with higher-value homes who plan on moving to homes with a mortgage of $750,000 or more, the new tax law could be more of a burden on them, says, Daniel Milks, a certified financial planner and CEO of Woodmark Wealth Management in Greenville, S.C. But the typical person doesn’t have a home worth about $1 million, Milks says.
“For the average homeowner, I think it’s a good thing,” he says of the tax law changes.
Home equity interest
Interest on home equity loans or home equity lines of credit are only deductible under the new law if the debt was used to “buy, build or substantially improve” the home secured by the loan.
The days of using your home as an ATM and using it to pay off credit card debt — and deducting the interest — are over if you want a tax deduction. Before 2018, you could use cash from these loans to buy a car, pay for college or take a trip, and deduct interest on up to $100,000 of the debt.
The new tax law kept the deduction for points paid on loans to buy, build or improve your primary home. If you’re refinancing your home loan, the points must be deducted over the life of the loan.
If the change in mortgage interest deductions isn’t enough to get you to take the standard deduction, the change in how much property taxes can be deducted when itemizing may be.
Homeowners in high-tax states such as New York, California, New Jersey and Connecticut may see their tax bills rise because their state and local tax deduction, known as SALT, is now capped at $10,000. This includes state and local income taxes, and property taxes.
With a household income of $200,000 to $400,000, state and local taxes could total nearly 10 percent of a family’s income and easily exceed the $10,000 deduction limit.
A way to deduct more than $10,000 — or $5,000 if you’re married filing separately — is if your home is used partially for business or partially rented out.
Taking the standard deduction would likely give them a bigger tax break than by itemizing. Again, you must choose one or the other — itemizing or the standard deduction — and can’t take both.
TurboTax estimates that the new tax deduction limitations will push about 90 percent of taxpayers to take the standard deduction, up from about 70 percent in previous years, instead of itemizing their deductions.