Tax Deductions for Homeowners

Tax Deductions for Homeowners: How the New Tax Law Affects Mortgage Interest

Tax changes for 2019 change the landscape for homeowners.

Tax season is upon us once again, and to make it even more interesting this year, the tax code has changed — along with the rules about tax deductions for homeowners. The biggest change? Many homeowners who used to write off their property taxes and the interest they pay their mortgage will no longer be able to.

Stay calm. This doesn't automatically mean your taxes are going up. Here's a roundup of the rules that will affect homeowners — and how big of a change to expect.

Standard Deduction: Big Change

The standard deduction, that amount everyone gets, whether they have actual deductions or not, nearly doubled under the new law. It's now $24,000 for married, joint-filing couples (up from $13,000). It's $18,000 for heads of household (up from $9,550). And $12,000 for singles (up from $6,500).

Many more people will now get a better deal taking the standard than they would with their itemizable write-offs.

For perspective, the number of homeowners who will be able to deduct their mortgage interest under the new rules will fall from around 32 million to about 14 million, the federal government says. That's about a 56% drop.

"This doesn't necessarily mean they'll pay more taxes," says Evan Liddiard, a CPA and director of federal tax policy for the National Association of REALTORS® in Washington, D.C. "It just means that they'll no longer get a tax incentive for buying or owning a home."

So will you be able to itemize, or will you be in standard deduction land? This calculator can give you an estimate.

If the answer is standard deduction, you'll be pleased to know that tax forms are easier when you don't itemize, says Liddiard. Find instructions for IRS Form 1040 here.

Personal Exemption Repealed

One caveat to the increase in the standard deduction for homeowners and non-homeowners is that the personal exemption was repealed. No longer can you exempt from your income $4,150 for each member of your household. And that might temper the benefit of a higher standard deduction, depending on your particular situation. 

For example, a single person might still come out ahead. Her $5,500 increase in the standard deduction is more than the $4,150 lost by the personal exemption repeal.  

But consider a family of four with two kids over 16 in the 22% tax bracket. They no longer have personal exemptions totaling $16,600.  Although the increase in the standard deduction is worth $2,420 (11,000 x 22%), the loss of the exemptions would cost them an extra $3,652  (16,600 x 22%).  So they lose $1,232 (3,652 – 2,420).

But say their two kids are under 16, giving them a child credit worth $2,000. That offsets the loss resulting in a $758 tax cut.

The takeaway: Your household composition will probably affect your tax status.

Mortgage Interest Deduction: Incremental Change

The new law caps the mortgage interest you can write off at loan amounts of no more than $750,000. However, if your loan was in place by Dec. 14, 2017, the loan is grandfathered, and the old $1 million maximum amount still applies. Since most people don't have a mortgage larger than $750,000, they won't be affected by the cap.

But if you live in a pricey place (like San Francisco, where the median housing price is well over a million bucks), or you just have a seriously expensive house, the new federal tax laws mean you're not going to be able to write off interest paid on debt over the $750,000 cap.

State and Local Tax Deduction: Degree of Change Varies by Location

The state and local taxes you pay — like income, sales, and property taxes — are still itemizable write-offs. That's called the SALT deduction in CPA lingo. But. The tax changes for 2019 (that's tax year 2018) mean you can't deduct more than $10,000 for all your state and local taxes combined, whether you're single or married. (It's $5,000 per person if you're married but filing separately.)

The SALT cap is bad news for people in areas with high taxes. The majority of homeowners in around 20 states have been writing off more than $10,000 in SALT each year, so they'll lose some of this deduction. "This is going to hurt people in high-tax areas like New York and California," says Lisa Greene-Lewis, CPA and expert for TurboTax in California. New Yorkers, for example, were taking SALT deductions around $22,000 a household.

Rental Property Deduction: No Change

The news is happier if you're a landlord. There continue to be no limits on the amount of mortgage debt interest or state and local taxes you can write off on rental property. And you can keep writing off operating expenses like depreciation, insurance, lawn care, and utilities on Schedule E.

Home Equity Loans: Big Change

You can continue to write off the interest on a home equity or second mortgage loan (if you itemize), but only if you used the proceeds to substantially better your home and only if the total, combined with your first mortgage, doesn't go over the $750,000 cap ($1 million for loans in existence on Dec. 15, 2017). If you used the equity loan to pay medical expenses, take a cruise, or anything other than home improvements, that interest is no longer tax deductible.

Here's a big FYI: The new rules don't grandfather in old home equity loans if the proceeds were used for something other than substantial home improvement. If you took one out five years ago to, say, pay your child's college tuition, you have to stop writing off that interest. 

4 Tips for Navigating the New Tax Law

1. Single people may get more tax benefits from buying a house, Liddiard says. "They can often reach [and potentially exceed] the standard deduction more quickly." You can check how much you're likely to owe or get back under the new law on this tax calculator.

2. Student loan debt is deductible, up to $2,500 if you're repaying, whether you itemize or not.

3. Charitable deductions and some medical expenses remain itemizable. If you're generous or have had a big year for medical bills, these, added to your mortgage interest, may be enough to bump you over the standard deduction hump and into the write-off zone.

4. If your mortgage is over the $750,000 cap, pay it down faster so you don't eat the interest. You can add a little to the principal each month, or make a 13th payment each year.

By: Leanne Potts with National Association of Realtors House Logic

Will My Taxes Look Different Now That I'm a Homeowner?

Magic 8 ball says yes. Here's what to know to itemize tax deductions as a homeowner.

Taxes? Gross! Who wants to think about government paperwork, especially when your hand still aches from signing the 977 forms required to buy your first house? But listen up: As a new homeowner, you can typically wave bye-bye to the 1040-EZ form and say hi to itemizing your deductions on Schedule A.

That means you can combine the thousands you're now paying in mortgage interest and property taxes with what you're already paying in state and local income taxes. And bam! Suddenly, you've got more to deduct than the $6,300 standard deduction.

For recent first-time homeowners Ben and Stephanie Liddiard, buying a rambler in Layton, Utah, led to tax savings that fattened Ben's paycheck by $100 every two weeks. If you're like the Liddiards, home ownership will give you more deductions, so your taxable income will decrease and you could owe less in taxes.

What Deductions Should I Itemize?

• Loan costs and fees
• Mortgage interest
• Property taxes
• Private mortgage insurance

Not everyone who buys a home will end up itemizing and owing less in taxes, says Anna Berry Royack, an accountant who sees many first-time home buyer tax returns at her Liberty Tax office in Catonsville, Md.

To find out if you're eligible to itemize, add up your deductions with your handy home closing paperwork, says Berry Royack. The document you're looking for is either a HUD-1 Settlement Statement or a Closing Disclosure. (Lenders used the HUD-1 until late 2015, when they switched over to the more consumer-friendly Closing Disclosure.)

Here are the details on what you need to look for:

One-Time Deductions

Loan costs and fees. “Different lenders call their loan costs and fees different things," Berry Royack says. “Look for an 'application fee' or 'underwriting fee.' Also, if you paid points to get a lower interest rate, that's often deductible in the first year. Your lender might have called that 'buying down the rate' or 'discount fee' instead of 'points.' Points are easy to find on the Closing Disclosure because they're at the top of page 2 and labeled 'loan costs.'"

Related: New Closing Docs Protect You From Surprise Fees

Recurring Deductions (Woo Hoo!)

1. Mortgage interest. Most homeowners can deduct the interest portion of monthly mortgage payments -- not the principle -- each year. Exception: When your mortgage is close to being paid off, the interest is less than the principle. So even when combined with other deductions, you might not have enough to exceed the standard deduction. But that's a loooong way off for most of us.

To see how the mortgage interest deduction plays out in real life, consider first-time homeowners Ben and Stephanie Liddiard. They moved from a $1,000-a-month rental apartment to a $168,000, five-bedroom, two-story, 2,300-square-foot house outside Salt Lake City.

They had some deductions as renters, but those expenses were less than the $6,300 standard deduction they each got ($12,600 for marrieds), so as renters, they opted to take the standard deduction.

When they bought their home, the combination of mortgage interest, property taxes, Utah's 5% income tax, charitable contributions, and some unreimbursed medical expenses incurred during Stephanie's pregnancy, added up to more than $12,600. Hello, itemization.

All these deductions reduced their income, so they owed about $2,600 less in federal and state income taxes.

Once they knew how much lower their tax bill was going to be, the Liddiards had two choices:

1. Leave their payroll tax withholding as it was and get a $2,600 refund the following year.
2. Adjust their tax withholding so the extra $2,600 wasn't taken out of their paychecks any more.

The Liddiards went with No. 2. “I changed my withholding so I get about $100 more [in each] paycheck instead of a big refund," Ben says. That's smarter than letting the IRS hold on to that until refund season since the IRS pays zero interest on the money you overpay in taxes.

Tip: You know what would be an even smarter move? Opting to automatically divert that $100 per paycheck into a home repair savings account. Once you've saved a tidy 1% of the value of your home, you could use that money to fund your 401(k) or your kid's college costs.

2. Property taxes. Property taxes are also deductible, but they can be tricky in the year you buy the home because both you and the sellers owned the property during that year. Sadly, you only get to deduct the property taxes you owed for the portion of the year you owned the home; the seller gets the rest of the deduction.

This info shows up on the Closing Document as “adjustments for items paid by seller in advance" or "adjustments for items unpaid by seller."

Tip: Who pays the property taxes in the year of the sale -- the buyer or seller -- is negotiable, but not who gets the deduction. Say you live in a sellers' market and to sweeten the deal agree to pay the full year of property taxes for the seller. Nice negotiating! But you still can't claim the full year deduction under IRS rules.

Other stuff on the not-so-deductible list:

• Transfer fees for changing title from the sellers to you.
• Recordation fees to put the title change into public record.
• Homeowner or community association fees. They feel like a tax because you gotta pay 'em, but they're not.

3. Mortgage insurance. Private mortgage insurance, which many homeowners pay each month if they put down less than 20%, is deductible for many every year you pay it.

Private mortgage insurance protects lenders when they accept low down payments. To claim the deduction, your adjusted gross income (AGI) must be no more than $109,000. The deduction phases out once your AGI exceeds $100,000 ($50,000 for married filing separately) and disappears entirely at an AGI of more than $109,000 ($54,500 for married filing separately).

Other types of insurance, like homeowners insurance, aren't deductible unless you can claim a portion of the home insurance because you work at home exclusively. “People can get those two confused," Berry Royack says.

Other Deductions You Might Overlook

As the Liddiards found, sometimes buying a house is the trigger that, combined with other deductions you might have, makes it worth busting out Schedule A. That stuff you donated so you didn't have to move it was probably a charitable donation. Those state and local taxes you paid could pay you back via itemization. Hopefully, you don't have to, but you can maybe tack on medical and dental expenses above 10% of your income and casualty and theft losses.

Special Circumstances to Keep in Mind

If this is your first year doing your taxes as a homeowner, it's worth splurging on an accountant to make sure everything goes down without a hitch. This is especially true if one of these special circumstances apply:

1. You work from home. If you take conference calls in the same place your dog lives -- that is, your home office is your exclusive, regular place of business -- you might be able to deduct a portion of your home ownership costs under the home office deduction. “That's a $1,500 deduction for a 300-square-foot office. Or you can deduct more if you have a larger office or the actual costs for you home office are higher," Berry Royack says. The standard home office deduction is $5 per square foot. If you're self-employed, you'll be taking this deduction on Schedule C.
2. Your lender sold your mortgage to a different lender. “That happens to a lot of people about five minutes after they walk out of the closing," Berry Royack says. “If you're one of them, you'll need to remember to look for two sets of year-end disclosures -- one from each company that had your loan."

Add the numbers from both year-end forms to get the amount to deduct. If the numbers don't look right, call the agency or company that services the mortgage and double-check the figures or ask your accountant to do it. “We see a lot of returns [at our firm], so we usually can tell if your property tax figure looks right, and we know where to check," Berry Royack says.