As you may now be aware, the Tax Cuts and Jobs Act, which became law in late 2017, made changes to the tax code that may affect homeowners. Let’s look at what those changes are and ways you can adjust your finances if you aren’t able to deduct as much of your home-related expenses as you were in years past.
Big Homeowner Change #1: $10k Limit on State & Local Taxes
One major argument in favor of buying a home used to be that you could save money on your taxes. Specifically, the federal tax code pre-Tax Cuts and Jobs Act let homeowners deduct what they paid in state and local income taxes (commonly called SALT in the tax world) from their federally taxable income.
So if you made $100,000 but paid $15,000 in SALT (including state income OR sales tax, property taxes, and whatever else you paid), your taxable federal income would be just $85,000 – before taking other deductions.
But the new law limits the amount filers can deduct to just $10,000 of SALT expenses.
What that means for homeowners: As with any tax law, the effect this has will depend on the specifics of your situation. Generally:
- If your total SALT expenses are $10,000 or less, you likely won’t see any change.
- If your total SALT expenses exceed $10,000, you may have a larger tax burden this year.
Why the hedging? Because another important change took effect that will determine your tax bill: the standard deduction almost doubled, from $6,375 for individuals to $12,000 and from $12,700 to $24,000 for couples. The above deductions only matter if you opt to itemize your taxes instead of taking the standard deduction.
Everyone’s situation is different, but generally, if your total available deductions don’t exceed the standard deduction amount, it’s probably easier and more cost-effective to take the standard deduction.
Homeowners can now only deduct $10k in state and local income taxes.
Big Homeowner Change #2: $750k Limit on Mortgage Interest Deduction
Another reason owning a home offers some tax advantages is that you can deduct the interest you pay on your mortgage loan to lower your overall tax burden.
Prior to this filing year, filers could deduct interest on mortgages up to $1 million; starting this year, though, the total mortgage value has been capped at $750,000 (or $375,000 for married couples filing separately).
What that means for homeowners: With the median home price in the US at about $230,000, most homeowners will likely be able to deduct all their mortgage interest (though obviously, home prices vary greatly by region).
Like the SALT deduction cap, though, the mortgage interest cap could be affected by the increased standard deduction in that fewer taxpayers are likely to itemize this year. (In fact, the Joint Committee on Taxes has estimated that as many as 88 percent of households will opt for the new standard deduction.)
4.6 million Americans are likely to see a smaller return than in years past. Another 4.6 million will owe money at tax time.
Smaller Return? Try These Financial Fixes
While most Americans ended up with a lower overall tax burden in 2018, a change to withholding tables means that many will see smaller returns when they file this year: the IRS updated how employers are supposed to do withholdings for employees – that is, how much money employers withhold from regular paychecks to devote toward income taxes.
As a result, the IRS estimates that 4.6 million Americans are likely to see a smaller return than in years past and another 4.6 million who once got a return will this year owe money at tax time. Most of us saw our “return” money in dribs and drabs throughout the year, as slightly larger paychecks – but few of us noticed.
So if you were counting on (or hoping for) a big, juicy tax return, you may be disappointed. But there are still a few steps you can take to either lower your tax burden this year or cut costs to make up for a smaller return:
- Contribute to your IRA: Contributions made by April 15, 2019, can reduce your taxable income AND fund your retirement. If you’ve got some money lying around, this might be a win-win.
- Know all the deductions: While the popular property tax deduction was lowered in the new law, other deductions still exist: charitable giving, certain medical expenses, green home renovations, and more. Depending on your circumstances, you may still get a better deal by itemizing this year – if you’re not sure, consult a tax professional.
- Increase your withholdings: Increasing your withholdings through your employer can yield a larger return next tax season. Keep in mind, though: most personal finance professionals don’t recommend doing this because it amounts to giving a free loan to the government – but if you struggle with saving money, this can be an effective way to do it.
- Start a new savings account: An alternative to increasing withholdings is to open a new savings account and setting up automatic deposits from each paycheck. If you put aside just $20 every week, you’ll have $1,040 in a year.
- Start a brokerage account: Set up a brokerage account with a company like Fidelity or M1 Finance and funnel monthly deposits there. That way, you’ll earn interest on whatever you save.
- Cut household expenses: If you were hoping for a tax-return windfall that didn’t materialize, make up the difference by looking for places to trim: could you bundle your cable, phone, and internet for savings? Or threaten to switch to a different provider to get discount? What about your home and auto insurance? When was the last time you shopped those policies around for savings?
Of course, owning a home is about far more than getting tax breaks. But planning ahead now could mean a happier tax season next year.