How will taxes change for homeowners in 2018?
It’s that time of year when we start gathering our tax documents in preparation for the annual filing. You probably got your W-2s or 1099s in the mail in the early new year, and you are gathering your paperwork, seeing what you might be able to itemize. If you are a homeowner, you are probably wondering how to make sense of all the information in the news about property tax and the like. And if you are a home buyer, you’re wanting to make a smart decision, given the new tax landscape. To sort it out for us, we’ve brought in a real expert in both taxes and personal finance to give us the run down of what we need to know in a way that we can really understand. How will homeowners’ taxes change in 2018 is a tricky subject, and our expert is up to the job.
Valerie Adelman has over 30 years of experience in the financial services industry. She provides comprehensive financial planning, investment management, tax preparation and divorce services. She’s both a Certified Financial Planner and an Enrolled Agent with the IRS. Her company is called Chestnut Financial, LLC, a tax and accounting firm, and she’s also a principal at Financial Asset Management Corporation.
1. What are the main categories of changes that homeowners will see with this new tax bill?
The major changes that homeowners need to look out for in their 2018 tax filings are the following:
- There is a cap of $10,000 that you can deduct for state and local income taxes, sales tax and property taxes. Previously, there was no cap.
- The standard deduction for 2018 has increased to $12,000 for individuals and $24,000 for couples filing joint, which is almost double what the amounts were in 2017.
- In 2018 mortgage interest is limited to $750,000 of debt vs. the $1,000,000 limit in 2017. However, If you had a mortgage in place prior to 2018 that was over the new $750,000 debt limit, then you are grandfathered into being able to continue to take the tax deduction up to $1,000,000.
- Interest on a home equity loan is no longer deductible at all with the new rules.
- In 2018 only, out of pocket medical expenses that exceed 7.5% of adjusted gross income (AGI) can be deducted as an itemized deduction. In 2019 the limit reverts back to 10% of AGI for medical expenses to be deductible.
- Miscellaneous deductions will no longer be deductible in 2018. Included in the miscellaneous deduction category are employee unreimbursed business expenses, investment expenses, tax preparation fees and job hunting costs.
- Charity donations remain deductible and are limited to 60% of adjusted gross income versus 50% of adjusted gross income in previous years.
With the limit on the overall tax itemized deductions to $10,000 in total, many people will find that the standard deduction exceeds their actual paid deductible expenses, particularly those individuals that have no mortgage.
2. What are the new standard deduction amounts?
Here’s a chart of the new standard deduction amounts for 2018 vs. 2017:
As you can see, the standard deduction amounts are nearly doubling in all categories.
3. Can you explain the new $10,000 cap on deductions from state and local taxes, sales tax and property taxes?
In previous years, if you itemized your deductions, you could deduct your property tax fully. In addition to your property tax deductions, you could deduct either state and local income taxes that you paid, or sales tax that you paid.
If you are currently working and live in a place with state and local income taxes, such as California and New York, your state and local income taxes most likely would be more than the amount of sales tax that you paid, so in previous years, you would choose to take the deduction for state and local income tax instead of sales tax.
However, if you are currently working and live in a place with no state or local income taxes, such as Florida or Nevada, in previous years you would choose to take the sales tax deduction instead. Also, if you live in a place with state and local income tax but you are not working, most likely you would take the sales tax deduction, as that would be a greater benefit to you.
The big change for 2018 is that there is a $10,000 cap on the deduction you can take for property tax plus state and local income tax, or, property tax plus sales tax.
What this means is that if you pay a lot of property tax, or state and local income taxes or sales tax, you cannot realize the full deduction that you would get in previous years. Your deductible amount is capped at $10,000.
4. For a homeowner who itemized in 2017 with various expenses, how might their situation change in 2018?
The best way to illustrate this change is in a side-by-side comparison.
In this example, we have a homeowner who took a deduction for state and local income taxes and property tax in 2017, who has a home equity loan and a mortgage, who makes charity donations, and also took miscellaneous deductions such as for unreimbursed work expenses.
As you can see, their state and local income tax plus property tax is restricted to a $10,000 deduction, instead of the $23,000 deduction they took in 2017. Their mortgage interest deduction remains the same, as they have a mortgage that is under the $750,000 threshold. They won’t get any deduction from their home equity loan interest, as that was eliminated. Their charity deduction remains the same, but they will not be able to take any miscellaneous deductions as those were eliminated.
Now, if this person was filing jointly as a married person, they would want to take the standard deduction in 2018 instead of itemizing, as $24,000, the standard deduction for joint filing as married, is a larger deduction than $20,000.
However, if this person was filing as single, they would still want to itemize, because the standard deduction for single people is $12,000, and $20,000 is a larger deduction than $12,000.
5. Why is there talk about homeowners in high property tax states getting hit hardest? Can you give us an example of how the tax bill will play out in a high property tax state vs low?
In high property tax states, homeowners often pay more than $10,000 in real estate taxes and income tax withholding when those amounts are added together.
For example, a person who has $5,000 in state and local tax withholding from an employer and pays $11,000 in property taxes would only be able to deduct $10,000 in 2018 vs. $16,000 that they would have been able to deduct in 2017 and prior years. In states such as New York where property taxes alone often exceed $10,000, individuals lose the ability to deduct much of their property taxes, and in this example, deduct none of their state and local tax payments.
6. Can you explain the new mortgage interest deduction changes?
In previous years, homeowners could deduct interest on mortgages up to $1,000,000. And, that is still the case if you got your mortgage before December 15, 2017. But, if you got your mortgage on or after December 15, 2017, you can deduct interest on mortgage debt of $750,000 only.
7. In what situations will homeowners benefit from the tax changes?
Homeowners who did not itemize in 2017 and won’t in 2018 will see a higher standard deduction, nearly double what they would have had in 2017.
Also, homeowners who itemized in 2017, but their deductions came to less than the new standard deductions amounts for 2018 will benefit.
8. What can homeowners do to lower their tax burden, if anything? Are there any strategic moves they can make, now, or in the future given the new tax law?
Any medical expenses, if significant, should be paid for in 2018 as the threshold to be able to deduct the expenses is lower in 2018 than it will be in 2019. Charity deductions are deductible up to 60% of income and remain, as always, a good thing to do for tax and other reasons.
9. For home buyers, what should they take into consideration now that they might not have before when selecting a home?
When buying a home it is now more important than ever to consider the after-tax cost as the tax benefits most people recall have changed. For the majority of home buyers in America the mortgage interest amount will continue to be deductible (if they itemize). But, if you are borrowing more than $750,000, you will not get any mortgage interest deduction on amounts over that threshold.
Home buyers may not get any tax benefit, or a more limited benefit, for the property taxes that they will pay, since there is a $10,000 cap on combined taxes as discussed in questions #1 and #3 above. They will need to adjust their take home pay from employers (with a higher withholding) to reflect the additional money needed to pay for the new mortgage and tax bills, considering the benefit or lack thereof of tax benefits.
It is advisable to consider the cost of property and school taxes when searching for a new home as those costs may not be deductible. Taking out a mortgage may actually help individuals to take itemized deductions, as it will help them exceed the standard deduction.
10. Are there any special tips that you are giving your homeowner clients this year?
Consider the effects of taking out a mortgage, given that property tax deductions, sales tax and state and income tax deductions are limited. People who havea mortgage may find themselves in more of a position to itemize, as the mortgage interest deduction is still available to you.
As home equity loans no longer have the benefit of deducting interest, they become less attractive. Given your unique situation, you might weigh alternate financing methods, such as paying them off and/or refinancing instead.
It would be smart to pay for your medical expenses if possible in 2018, as it is more favorable than in 2019. Continue your charitable giving, and be mindful of the aftertax cost of owning a home to make sure your withholdings are adequate to pay for your tax liability.
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