With the new tax reform bill finally in the books, the time for fighting over the bill is over. Now it’s time to let the fight over how it’s going to affect taxpayers, begin. There’s no question the new law is going to affect nearly all taxpayers, as well as several industries. How much effect it will have is a big question. One industry that could see great change is the housing industry, as well as homeowners in general. How much you’re affected depends on several key factors, including where you live, your housing budget, and how the new tax laws affect your overall tax bill.
Mortgage Interest Deduction
Let’s start with the mortgage interest deduction. This is by far one of the most popular deductions every year and millions of taxpayers take advantage of it. However, with the new bill in place, there will be changes. The deduction still exists, but if you purchase a home between now and 2026 you can only deduct the interest on any mortgage worth up to $750,000 or less. For those who bought their home before December 14, 2017, the cap will still be $1 million. For those who buy more expensive homes that is a significant difference. That means many wealthy homeowners, as well as people who live in states and cities with more expensive housing, will be affected. It also could discourage wealthy homeowners from moving away from their current homes.
State and Local Tax Deductions
Another big controversy in the new law has been the reduction of state and local tax deductions. Before the tax reform, taxpayers could deduct all state and local property taxes on their return. Furthermore, taxpayers could also deduct state and local income taxes or state sales taxes. Under the new law, all of these taxes are lumped together and taxpayers can only deduct up to $10,000 total, no matter your filing status. While this will not affect every taxpayer, for people who live in high-tax states like California, New York, Connecticut and New Jersey, the change will be costly. That’s because $10,000 doesn’t come even close to covering these taxes for many taxpayers in high-tax states.
States Are Fighting Back
This part of the bill has been so controversial that many state governments are trying to create ways to circumvent the bill. California, for example, has already introduced legislation that would allow taxpayers to make “charitable contributions” to the state instead of tax payments. That’s significant because the bill does not put a limit on deductions for charitable donations.
What About Everyone Else?
For those who own a modestly priced home or live in areas of the country with smaller housing and tax bills, the news is still not all good. That’s because the standard deduction has also gone up to $12,000 for individuals and $24,000 for married couples. The increase sounds attractive, but it also means that many taxpayers’ itemized deductions will now be less than the standard deduction. Therefore, they won’t be able to take advantage of itemizing their state and local income tax and mortgage interest deductions.
Good News For Capital Gains on Home Sale
There is at least one piece of good news. Anyone who sells their home can exclude as much as $250,000 in capital gains from the sale of that home (up to $500,000 if married).