Just prior to Christmas, President Trump signed the Tax Cuts and Jobs Act into law, and experts everywhere are still frantically debating whether the new tax law is a welcomed stocking stuffer or a lump of coal for taxpayers—specifically, current and potential homeowners. The impact on individual taxpayers varies dramatically depending on each person’s unique financial outlook and we’ve broken down what you might be able to expect.
Standard Deductions on the Rise
Possibly the most significant revision with the greatest potential to impact a majority of taxpayers are the increases to standard deductions, which has nearly doubled for individuals and married taxpayers. An individual filer can now claim a $12,000 standard deduction, and married taxpayers filing jointly can claim a $24,000 standard deduction.
This likely means that most taxpayers will no longer itemize deductions, a shift that could have ripple effects throughout their entire tax portfolio.
Mortgage Interest Deduction Cuts
Prior to the new tax law, taxpayers could deduct the interest they paid on mortgage debt up to $1 million ($500,000 if married filing separately). This is still the case for homes purchased before December 15, 2017.
For homes purchased after December 15, 2017, homeowners may deduct interest paid on mortgage debt up to $750,000 ($375,000 if married filing separately).
Homeowners with total primary and secondary residence mortgage debt falling below the $750,000 threshold will not be impacted by the change. Experts expect the bulk of the ramifications to be felt in large coastal cities, where home prices are high enough to push homeowners beyond the $750,000 threshold.
State and Local Tax (SALT) Deductions
Under the previous tax law, property taxes were an eligible itemized deduction, as were state and local income or sales tax. The new law bundles these SALT taxes together and limits the deduction to $10,000 for individuals and married filers alike. The impact from this change will likely be felt in areas with lower home prices but higher taxes.
Say Goodbye to the Home Equity Deduction
Beginning in 2018, the deduction for interest paid on home equity loans has been eliminated. Previously, individuals could deduct interest on up to $100,000 of home equity debt, or $50,000 if married filing jointly.
The new law eliminates this deduction altogether. However, the significantly increased standard deduction could mean that many taxpayers with home equity loans will not be impacted, as they would now take the new standard deduction regardless.
Capital Gains Remain Untouched
Capital gain is the difference between the price you paid for a home versus the price you sold the home for. Previous tax code permitted individuals who owned a home and used it as a primary residence for two of at least five years before the date of sale to exclude up to $250,000 of capital gains from taxation ($500,000 if married filing jointly). While in development, one of the more controversial aspects of the new tax law being debated was eliminating this exclusion; however, the capital gain exclusion remained unchanged when the new tax bill was signed into law.
Every taxpayer’s financial situation is unique, and we recommend that you consult a financial expert for advice specific to your individual tax or homeownership scenario. And if you think the tax talk is over, think again. Most of the individual provisions of the new tax law are set to expire in 2025. This means the discussions centered on the country’s evolving tax code are not finished by any stretch.