We have closed another year and find ourselves scrambling for tax planning purposes. We’ve decided our New Year’s Resolution for 2019 will be to get our financial ‘house’ in order! We decided we aren’t going to suffer another April 15th because the year flew by too quickly to make a game plan, right?
As you prepare your 2018 tax organizer or tax return here’s what The Tax Cut and Jobs Act did to us in 2018:
The deduction for all state and local taxes, including property taxes is capped at $10,000. This limit applies to homeowners and their Schedule A property taxes. It does not apply to taxes paid on business or rental property.
What does this change mean? It can mean that you get no tax benefit for the property taxes that you pay. For example, if your state income taxes exceed the $10,000 deduction limit, your federal income taxes are not reduced by the payment of property taxes. If your state income taxes are $7,000 and your property taxes are $6,000, only $3,000 of your property taxes end up deductible on your federal tax return. You get no tax benefit for the remaining property tax payment.
Mortgage interest continues to be deductible but the limit on debt used to purchase, construct or substantially improve your personal residence has been reduced for new mortgages. The limit on mortgage debt for purposes of the mortgage interest deduction is reduced from $1,000,000 to $750,000 for loans made after Dec 15, 2017. Loans made before Dec 15, 2017 are grandfathered at the $1,000,000 debt limit.
Interest on equity debit is no longer deductible. This means that the interest paid on the borrowing from the equity of your home to pay off personal debts (such as credit card debt, auto loans, or student loans) is not deductible beginning in 2018.
Second home interest continues to be deductible. But, the combined total of the acquisition debt on your first and second home cannot exceed $750,000 ($1,000,000 if the debt is incurred prior to Dec 16, 2017)
What does this change mean? If your acquisition mortgage(s) is less than $750,000, the change does not affect you. If you purchase your home a few years ago and your acquisition mortgage(s) is less than $1,000,000, the change does not affect you because of the grandfathering provision. But if you’re buying a new home this year, the interest you pay on a mortgage above $750,000 will not be deductible. If you borrowed from the equity of your home, this year or in a prior year, to pay off personal debt, the interest on the equity borrowing is not deductible. It was deductible in 2017.
The new tax reform law doubles the standard deduction. The higher standard deduction ($12,000 for singles, $18,000 for heads of household, and $24,000 for married filing joint) means that few taxpayers will benefit from itemizing deductions.
What does this change mean? It may mean that the standard deduction is more than your itemized deductions (medical expense, state tax and property tax, mortgage interest, and charity). For example, you are married and file a joint tax return. Your standard deduction is $24,000. Your 2018 itemized deductions are $10,000 of taxes, $10,000 of mortgage interest and $2,000 of charity. Since your itemized deductions are less than $24,000 you get no tax benefit from paying any of your itemized deductions, including the property taxes and mortgage interest on your home.
Changes were proposed to the home sale rules. No changes were included in the final tax reform law. You may still exclude up to $250,000 ($500,000 married filing joint) of the gain on the sale of your principle residence if you have owned and occupied the home for two of the prior five years.
Consult with your tax accountant for your personal situation.
Melissa Zimmermann, Enrolled Agent and REALTOR
An Investment You Can Live In