What to Know About Your Mortgage Before You File Your 2018 Taxes
Understanding How the New 2018 Trump Tax Laws Impact Your Mortgage
Midway through 2017, Congress has passed the largest piece of tax reform legislation in more than three decades. The Trump administration tax cuts went into place on January 1, 2018, which means that it will affect your taxes when filing this year. Here’s a quick overview:
- This law has trimmed or eliminated many deductions. But for standard deductions, it’s the opposite. It will be nearly doubled. That will help soften the blow of the elimination of personal exemptions.
- The standard deduction, which taxpayers can take instead of itemizing, rises to $24,000 dollars for married people filing joint returns and $12,000 dollars for single people.
- As far as tax rates and brackets, the new law keeps the same seven brackets. But rates and income levels change a bit.
- For married couples, the top rate drops to 37% and that won’t kick in until your taxable income hits 600,000. For single people it’s now 500,000.
- The new 35% bracket will have lower starting points– $400,000 for married people and $200,000 for single people.
- For State and local taxes– an individual’s itemized deduction for state income taxes and local property taxes will be capped at a total of 10,000 dollars.
Now to how this law impacts what is likely your largest monthly expense, your mortgage.
The Mortgage interest deduction will now be limited to interest on the first $750,000 you borrow. That’s down from $1 million dollars, but existing loan debt would be grandfathered in. This new law cut deductions for home mortgage interest and property taxes.
Let’s break that down for you:
You can still claim an itemized deduction for the interest on up to $750,000 of mortgage debt, whether it goes towards improvements or a new home. (That number is $375,000 if you use married filing separate status.) So, what changed? Well, the old debt limits were $1 million and $500,000 respectively, and you could also deduct the interest on up to $100,000 of home equity debt, or $50,000 if you used married filing separate status. To meet the definition of a “qualified residence loan,” the debt must be secured by the taxpayer’s home (primary or second home), and must meet certain other requirements.
So, what does this mean to you?
Well, the mortgage interest deduction is still an itemized deduction, which means that in order for you to use it, your itemized deductions, including mortgage interest, need to be greater than the standard deduction. Now, in prior years, this has allowed millions of people to deduct their mortgage interest. However, the Tax Cuts and Jobs Act nearly doubled the standard deduction, and as a result, fewer people will be able to use the deduction.
This impacts the roughly 30% of taxpayers who have traditionally itemized deductions each year. The predictions are that number will now drop to 5%. In other words, a quarter of the U.S. population will no longer be able to itemize deductions, and therefore won’t be able to use the mortgage interest deduction in 2018.
Now, let’s tackle the second part, home equity loans. If the proceeds from the loan are used to buy, build, or improve the home that secures the loan, they are still deductible as “qualified personal residence” loans. That means, if you borrow against your main home to add an addition or renovate your living room, the interest can potentially be deductible, but if you borrow against your home equity to pay off credit card debt the deduction no longer applies.
So, is the bit about home equity loans good or bad? Well that depends on your situation.
If you have home equity debt that was secured for purposes other than home improvements (or other qualified purposes,) your interest will no longer be deductible. However, if you do obtain home equity debt that will be used for qualified purposes, you still get to deduct the interest, and the deduction could be even better.
It’s important that you understand what you are getting into. If you are thinking of buying a home this year, the new tax code will apply. Preferred Lending Solutions can help you navigate these confusing waters during the loan application process. Reach out to us to get started!