Mon Apr 8 2019
The new tax plan impacts your deductions and property tax credits.
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.
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:
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.
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.
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:
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.
Start Saving on Your Home Insurance