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Personal Exemption Repealed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caveat to the increase in the standard deduction for homeowners and non-homeowners is that the personal exemption was repealed.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

Small Home Storage: Maximize Your Storage Space

Your small home has more storage space than you think. For relatively little money but a lot of common sense and ingenuity, there’s space to be found.

Finding storage space in a small home doesn’t require remodeling or room additions. Start by getting rid of accumulated stuff. Take a hard look at room space, and buy furniture and storage items that can do double duty.

Here are six tips to maximize storage that won’t empty your savings account:

1. Declutter

It’s the first thing architect Sarah Susanka of “Not So Big House” tells clients who talk of expanding their homes. Haven’t used something for a couple of years? Pitch it, she says. You’ll be amazed at how much space opens up when you do.

Cost: $0

2. Platform and Bunk Beds

Add space and eliminate a dresser in a small bedroom with a three-drawer or six-drawer platform bed. Find one at a furniture or big department store, and online.

Cost: $225 to $600 and up, queen size

Bunk beds won’t have drawers, but you'll save space by stacking beds. And kids love ‘em. They come in a variety of styles and configurations. Some will convert to two twin beds.

Cost: $180 to $400 and up

3. Shoe Organizers

They’re for so much more than just shoes. Hang one in a kitchen closet or pantry, and use it as your small home catch-all for remotes, keys, notepads, cell phones, and chargers, and other household essentials. It’ll free up a kitchen drawer or two for other uses.

Cost: Less than $20

4. Toe-Kick Storage

The space under your kitchen cabinets is a treasure trove of storage possibilities. Put placemats, napkins, cookie sheets, and how-to manuals there. Hire a cabinet-maker to install them, or request them as a custom feature in a new cabinet order.

Cost: About $300 per drawer

5. Floor-to-Ceiling Storage

Furniture-style 6-foot-tall bookcases don’t use all available wall space. But extend shelving that extra two feet to the ceiling, and you’ve got room for a lot more books, knickknacks, or art objects. Home improvement stores have brackets and shelves in a variety of colors and sizes to match your décor.

Cost: Under $200, depending on the space size

7 Tips for Staging Your Home

Make your home warm and inviting to boost your home’s value and speed up the sale process.

The first step to getting buyers to make an offer on your home is to impress them with its appearance so they begin to envision themselves living there. Here are seven tips for making your home look bigger, brighter, and more desirable.

1.  Start with a Clean Slate

Before you can worry about where to place furniture and which wall hanging should go where, each room in your home must be spotless. Do a thorough cleaning right down to the nitpicky details like wiping down light switch covers. Deep clean and deodorize carpets and window coverings.

2.  Stow Away Your Clutter

It’s harder for buyers to picture themselves in your home when they’re looking at your family photos, collectibles, and knickknacks. Pack up all your personal decorations. However, don’t make spaces like mantles and coffee and end tables barren. Leave three items of varying heights on each surface, suggests Barb Schwarz of Staged Homes in Concord, Pa. For example, place a lamp, a small plant, and a book on an end table.

3.  Scale Back on Your Furniture

When a room is packed with furniture, it looks smaller, which will make buyers think your home is less valuable than it is. Make sure buyers appreciate the size of each room by removing one or two pieces of furniture. If you have an eat-in dining area, using a small table and chair set makes the area seem bigger.

4.  Rethink Your Furniture Placement

Highlight the flow of your rooms by arranging the furniture to guide buyers from one room to another. In each room, create a focal point on the farthest wall from the doorway and arrange the other pieces of furniture in a triangle around the focal point, advises Schwarz. In the bedroom, the bed should be the focal point. In the living room, it may be the fireplace, and your couch and sofa can form the triangle in front of it.

5.  Add Color to Brighten Your Rooms

Brush on a fresh coat of warm, neutral-color paint in each room. Ask your real estate agent for help choosing the right shade. Then accessorize. Adding a vibrant afghan, throw, or accent pillows for the couch will jazz up a muted living room, as will a healthy plant or a bright vase on your mantle. High-wattage bulbs in your light fixtures will also brighten up rooms and basements.

6.  Set the Scene

Lay logs in the fireplace, and set your dining room table with dishes and a centerpiece of fresh fruit or flowers. Create other vignettes throughout the home — such as a chess game in progress — to help buyers envision living there. Replace heavy curtains with sheer ones that let in more light.

Make your bathrooms feel luxurious by adding a new shower curtain, towels, and fancy guest soaps (after you put all your personal toiletry items are out of sight). Judiciously add subtle potpourri, scented candles, or boil water with a bit of vanilla mixed in. If you have pets, clean bedding frequently and spray an odor remover before each showing.

7.  Make the Entrance Grand

Mow your lawn and trim your hedges, and turn on the sprinklers for 30 minutes before showings to make your lawn sparkle. If flowers or plants don’t surround your home’s entrance, add a pot of bright flowers. Top it all off by buying a new doormat and adding a seasonal wreath to your front door.

By: G. M. Filisko With House Logic

Season-by-Season Lawn Maintenance Calendar

Tips for a barefoot-worthy lawn that'll ensure your home has uber curb appeal.

Ahhhh, that sensation of stepping onto a freshly mowed lawn sans footwear. There’s nothing like it.

Here’s how to ensure that grassy feeling from spring to fall.

Early Spring

Like so many maintenance jobs, everything goes smoother -- and you’ll get better results -- with proper preparation. Early spring is the time to get ready for lawn-growing and mowing season.

Related: How to Bring Back Your Lawn After Winter Damage

Sharpen mower blades to ensure clean cuts. A dull blade tears the grass, leaving jagged edges that discolor the lawn and invite pathogens.

Sharpen mower blades once each month during grass-cutting season. Have a backup blade (about $20) so that a sharp one is always on hand.

Tune up your mower with a new sparkplug ($3 to $5) and air filter ($5 to $10). Your mower might not need a new sparkplug every season, but changing it is a simple job, and doing it every year ensures you won’t forget the last time you replaced your sparkplug.

Buy fresh gas. Gas that’s been left to sit over the winter can accumulate moisture that harms small engines. This is especially true for fuel containing ethanol, so use regular grades of gasoline.

If you need to dump old gasoline, ask your city or county for local disposal sites that take old fuel.

Clean up your lawn. Time to get out the leaf rakes and remove any twigs and leaves that have accumulated over the winter. A thick layer of wet leaves can smother a lawn if not immediately removed in early spring. Cleaning up old debris clears the way for applying fertilizer and herbicides.

Spring

Depending on your weather, your grass will now start growing in earnest, so be ready for the first cutting. Don’t mow when the grass is wet — you could spread diseases, and wet clippings clog up lawn mowers.

Fertilizing: Both spring and fall are good times to fertilize your lawn. In the northern third of the country, where winters are cold, fertilize in fall — cool weather grasses go dormant over winter and store energy in their roots for use in the spring.

For the rest of the country, apply fertilizer just as your grass begins its most active growth. For best results, closely follow the application directions on the product. You’ll spend about $50 to $75 per application for an average 1/4-acre lot.

Aeration: Aerating punches small holes in your lawn so water, fertilizers, and oxygen reach grass roots. Pick a day when the soil is damp but not soaked so the aeration machine can work efficiently.

Related: More about lawn aeration

Pre-emergent herbicides: Now is the time to apply a pre-emergent herbicide to prevent crabgrass and other weeds from taking root in your lawn. A soil thermometer is a handy helper; you can pick one up for $10 to $20. When you soil temperature reaches 58 degrees — the temperature at which crabgrass begins to germinate — it’s time to apply the herbicide.

Early Summer

Watch out for grubs: Warm weather means that grub worms, the larvae stage of June, Japanese, and other beetles, start feeding on the tender root systems of lawns. Affected lawns show browning and wilting patches.

To be certain that the culprits are grubs, pull back the sod and look for white, C-shaped grubs. If you see more than 10 per square foot, your lawn should be treated with a chemical pesticide.

Milky spore is an environmentally friendly way to control some species of grubs. When using insecticides, read and follow all label directions, and water the product into the soil immediately. Cost is around $50 to $75 per application.

Grass-cutting tip: Your grass is starting to grow fast, and you might even be cutting more than once a week to keep up. To keep grass healthy, mow often enough so you’re removing no more than 1/3 of the grass blade.

Pesky weeds: Weeds that have escaped an herbicide application should be removed with a garden fork. Use a post-emergent herbicide only if you think the situation is getting out of hand.

Check out our guide to some common types of weeds and tips on how to get rid of them. 

Summer

Here’s a good mantra to guide you through the heart of grass-mowing season: The taller the grass, the deeper the roots, the fewer the weeds, and the more moisture the soil holds between watering.

With that in mind, here’s how to ensure a healthy, green lawn:

• Set your mower blade height to 3 inches.
• Deep and infrequent watering is better for lawns than frequent sprinkles, which promote shallow root growth. In general, lawns need about 1 inch of water per week.

Lawns that receive less than that will likely go dormant. That’s okay, the grass is still alive, but dormant lawns should still receive at least 1 inch of water per month. Your grass will green up again when the weather brings regular rains.

• To check sprinkler output, scatter some pie tins around the yard to see how much water collects in a specific amount of time. Having a rain gauge ($5 to $20) will help you keep track of how much water the lawn receives naturally.
• At least once each month, clean underneath your mower to prevent spreading lawn diseases.
• Although it’s OK to leave grass clippings on the lawn where they can decompose and nourish the soil, remove large clumps. Regularly rake up any leaves, twigs, and debris.

If your grass seems to be stressed out, check out our advice on what to do if your lawn is turning brown.

Early Fall

The best time to patch bare or thin spots is when the hot, dry days of summer have given way to cooler temps. Follow these simple steps:

• Remove any dead grass.
• Break up the soil with a garden trowel.
• Add an inch of compost and work it into the soil.
• Add grass seed that’s designed for shade or full sun, depending. Spread the seed evenly across the bare patch.
• Use a hard-tooth rake to work the seed into the soil to a depth of about half an inch.
• Sprinkle grass clippings over the patch to help prevent the soil from drying out.
• Water the area; you’ll want to keep the patch moist, so lightly water once a day until the seed germinates and the new grass gets about one inch tall.

Fall

Your main job in fall is to keep your lawn free of leaves and other debris. You can use a mulching mower to break up leaves and add the organic matter to your soil, but be sure to clean up any clumps so they don’t kill the grass.

In the northern one-third of the country, now is the time to fertilize your lawn. Your grass will store the nutrients in its roots as it goes dormant over the winter, and your lawn will be ready for a jump start when spring warms the ground.

This is also the time to clean up your garden.

By: Douglas Trattner with 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.