How the New Tax Law Impacts Homeowners’ 2018 Taxes
Though the new tax law made sweeping changes in the federal tax code, its impact on homeowners is relatively minor. Middle-class homeowners will probably do as well or better under the new law than the old one unless they have a lot of mortgage debt or live in a state with high property taxes.
Thousands of homeowners are accustomed to deducting the interest they’ve paid on their mortgage and the property taxes they’ve paid to state and local governments during the year. These two deductions — mortgage interest and property taxes — made it into the final bill that was passed, but they were changed significantly. Understanding how they have changed will have an impact on your tax planning for 2018.
Probably the single change in the new law that will make the most difference to homeowners is not a tax deduction at all. The new law doubles the value of the standard deduction up to $24,000 for a couple filing jointly. Millions of homeowners are expected to take advantage of this change and choose the standard deduction rather than itemize. Some of the changes in the new law, especially the cap on property tax deductions, will make the standard deduction a better deal for them.
New Limits on the Mortgage Interest Deduction
The new law caps the amount of mortgage debt on which you can deduct the interest (including points when buying a home) at up to $750,000 for a joint return or $375,000 each for taxpayers who are married but file separate returns. Previously, the cap on allowable mortgage debt was $1 million on a joint return.
Homeowners who took out a mortgage to buy or renovate a second home could also deduct the interest on the first $100,000 of debt (or $50,000 if filing separately) that they incur on the second home under the new law. Under the new law, homeowners can deduct only interest on the mortgage on their primary home.
For their 2018 taxes, homeowners paying mortgage insurance premiums can deduct the amount they pay as mortgage interest. This tax break must be renewed by Congress every year and may not continue for 2019 taxes.
Homeowners also will no longer be able to deduct interest paid on home equity loans beginning in 2018, unless the funds are being used to improve the residence significantly. This provision expires in 2026.
New Cap on State and Local Property Taxes
Under the old law, homeowners could deduct the property taxes they pay state and local governments. The new law limits the amount property tax to $10,000. This limitation punishes homeowners who live in higher tax states like New Jersey, Illinois, Vermont, Texas, and New Hampshire.
Among metros with a population of at least 200,000, those with the highest effective property tax rates are Scranton, Pennsylvania (3.93 percent); Binghamton, New York (3.14 percent); Rockford, Illinois (3.03 percent); Rochester, New York (2.93 percent); and El Paso, Texas (2.63 percent).
The graphic below from Attom Data Solutions illustrates county property tax rates.
For more detailed information on how the new the tax law affects homeowners state-by-state, the National Association of Realtors has posted an analysis.
Why Tax Deductions Don’t Matter So Much Anymore
By raising the standard deduction to $12,000 ($24,000 for a joint return), tax deductions, including those that are popular with homeowners, are less critical. That’s because millions of homeowners will find that they will fare better by taking the standard deduction than itemizing. While the typical mortgage interest deduction is only $8,033, when the combination of deductions— mortgage interest, property taxes, charities and more — is totaled, some 13.8 million taxpayers are expected to claim the mortgage-interest deduction in 2018, down from more than 32.3 million in 2017, according to the Joint Committee on Taxation. That’s a drop of about 57 percent.