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Updated on Thursday, January 3, 2019
Tax legislation has quickly evolved in the year since the Tax Cuts and Jobs Act (TCJA) was signed into law on December 2017. Most individual taxpayers received lower income tax rates and several deductions were changed while others were untouched.
Homeowners in particular are impacted by the recent tax reform and would be well-served by taking time to understand what to expect as we wrap up another year.
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Homeownership and taxes
Buying a home comes with several tax expenses. You have the prepaid local property taxes you pay at closing, plus the taxes you pay on a monthly basis as part of your mortgage payment for the life of your loan, which can fluctuate from year to year. You may also pay taxes when you sell your home.
The average single-family homeowner paid about $3,400 in property taxes during 2017, which translates into an effective tax rate of 1.17%, according to a report from property data firm ATTOM Data Solutions — that’s a 3% bump from the prior year.
The silver lining of paying taxes is that homeownership has its tax benefits, though some of those incentives changed over the last year with the enactment of the tax reform bill.
Below we highlight and explain six tax deduction changes homeowners should keep on their radar as they prepare for the upcoming tax filing season.
6 tax changes that affect homeowners
The standard deduction, which reduces the amount of income you pay taxes on, was lower under the former tax law for the following filing statuses: $6,350 for single filers, $9,350 for head of household filers and $12,700 for married couple filing jointly.
Under the TCJA, the standard deduction has nearly doubled. The new deduction amounts are:
- $12,000 for single filers.
- $24,000 for married filing jointly.
- $12,000 for married filing separately.
- $18,000 for head of household filers.
You have the option to either itemize your deductions or take the standard deduction when filing your taxes. For itemized deductions, the TCJA suspended the limit on the total number of itemized deductions that certain higher-income taxpayers were allowed to make.
Mortgage interest deduction
Before the TCJA was enacted, new homeowners could deduct interest paid on mortgages valued up to $1 million for their main home and a second home, which are both categorized as qualified residences. They were also able to deduct interest paid on a home equity loan or home equity line of credit worth up to $100,000.
Under the new tax law, homeowners are only allowed to deduct interest paid on mortgages worth up to $750,000. For married taxpayers filing separately, the limit is $375,000.
Interest paid on home equity loans and HELOCs is still deductible, though the aforementioned limits apply. In other words, no matter the combined amount of your mortgage and home equity loans or lines, you can only deduct interest on $750,000 or $350,000, depending on your filing status.
Additionally, interest paid on home equity loans and HELOCs only qualifies for a deduction if that money is used to buy, build or substantially improve a home. Any other uses, such as paying off credit card debt, means the interest isn’t deductible, according to the IRS.
Taxpayers with mortgages on qualified residences that were originated prior to Dec. 15, 2017, are still eligible to deduct interest paid on up to $1 million mortgages, or $500,000 if married filing separately.
State and local taxes deduction
In the past, taxpayers who itemized their deductions were able to deduct the full amount they paid in state and local taxes from their taxable income. Under the Tax Cuts and Jobs Act, taxpayers are limited to a total deduction of $10,000 for state and local income, sales and property taxes. Married couples filing separately can only deduct $5,000.
Moving expenses deduction
The previous law allowed taxpayers to deduct moving expenses, provided the new home’s distance from the old home met a certain criteria and the new job qualifies as full-time employment.
The TCJA suspended the moving expenses deduction for everyone except U.S. military members who are on active duty. The suspension went into effect Jan. 1, 2018, and is in effect through Jan. 1, 2026.
Mortgage insurance premiums deduction
While the deduction for mortgage insurance premiums was extended through the end of 2017, it’s not immediately clear whether homeowners are allowed to deduct their mortgage insurance premiums when filing their 2018 taxes.
The 2017 instructions for Form 1040 explain the types of mortgage insurance that qualify for the deduction. These include mortgage insurance premiums paid on loans backed by the Federal Housing Administration, the Department of Veterans Affairs and the Department of Agriculture’s Rural Housing Service, as well as private mortgage insurance. The deduction was capped at $109,000 or $54,500 for married taxpayers filing separately.
Periodically check the IRS website for developments regarding whether the mortgage insurance premiums deduction will be extended for the 2018 filing season.
Residential energy credit
The residential energy efficient property credit was originally slated to expire in 2016, but was extended through 2021 as part of the tax reform law.
The benefit allows eligible taxpayers to take a 30% credit of what it costs to add alternative energy equipment in or on a home, including installation costs. According to the IRS, fuel cell properties, solar electric equipment, solar hot water heaters and wind turbines are all qualified equipment.