By Jenny Harris
You’ve probably heard that Congress recently passed a tax reform bill. Many people are asking if the new tax rules can save or cost them money. The answer is based on many factors that touch almost every aspect of your financial life. Two of the main factors are: your home and your mortgage.
Mortgage Interest Deductions
One of the most important changes of the new tax reform is to the mortgage interest deduction. In 2017, qualified homeowners, who itemized deductions on their taxes, could reduce their taxable income by the amount of mortgage interest they paid each year — on home loans up to one million dollars for married couples filing jointly and on loans up to $500K for married couples filing separately.1 (26 U.S. Code § 163.Interest)
With the new plan, mortgage interest is tax deductible only on home loans up to $750K for married couples filing jointly and on loans up to $375K for married filing separately. This change impacts all homes purchased after December 15, 2017, and it also applies to mortgages on second homes.2
The amount of actual interest paid on mortgages that is deductible depends on whether or not a person itemizes deductions. When one itemizes deductions, mortgage interest is an important item, but it may be limited based on the overall deductions listed on Schedule A.3 Be sure to speak with your tax advisor/accountant to understand how the tax laws will apply to your situation.
The new federal tax law also includes changes to deductibility of property taxes. There are now restrictions on the amount of property tax that can be deducted. For 2018, married homeowners filing jointly may deduct up to a maximum of $10K in property taxes or $5K for couples filing separately.4 These maximum amounts include both state and local income taxes and/or sales taxes, depending on what one plans to itemize.
The interest paid on home equity lines of credit, referred to as “HELOCs,” and second mortgages may no longer be tax deductible. However, if the HELOC or home equity loan was “used to buy, build or substantially improve the taxpayer’s home that secures the loan,” then it may still be tax deductible.5
Under the previous tax rules, deductions were included for qualified homeowners’ relocation expenses. Now, moving expenses are only deductible for active duty members of the armed forces.6
Ultimately the new tax plan will impact each taxpayer differently. How you are personally impacted is based upon various factors beyond homeownership. Be sure to speak with a tax professional to understand all of the details around the new tax reform and how the new tax rules will impact you and your family.
5February 21, 2018 IRS News Release, “Interest on Home Equity Loans Often Still Deductible Under New Law,” see: https://www.irs.gov/newsroom/interest-on-home-equity-loans-often-still-deductible-under-new-law
Jenny Harris is a Marketing Coordinator with AAFMAA. She lives in Aberdeen, North Carolina, with her husband Ben and their pup, Pilot.