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The tax overhaul Congress passed in late 2017 generally simplifies filing for millions of families in America with an increased standard deduction, but it can also limit some deductions that may have saved you a lot of money in the past. Homeowners, in particular, have several new deduction limitations to keep in mind when filing this season.
Here’s what you need to know to make the best decisions when filing your taxes this season and when planning ahead for future years.
In the past, if you itemized your tax return, you could deduct any interest payments made on up to $1 million in home-related debt. This debt had to be used for:
Under the new tax law, homeowners can only deduct mortgage interest paid on up to $750,000 on a first or second home. This new law only applies to homes purchased after Dec. 15, 2017.
This filing season: All other homes are grandfathered in to the old law, so if you are paying interest on debt between $750,000 and $1 million related to a home you bought before that date, your deduction will be the same. But if you bought a new home with a mortgage over $750,000, you will pay less than you would have under the old law.
Planning ahead: Many homeowners who are paying interest on a mortgage over $750,000 who purchased their home before Dec. 15, 2017, may want to consider staying put for a while. Purchasing a new home at a comparable purchase price may reduce the amount of mortgage interest you’re able to deduct.
In the past, homeowners have been legally able to deduct all state and local taxes they’ve paid on all properties they own. Under the new tax law, homeowners will only be able to deduct $10,000 each year in state and local taxes (SALT) starting with the 2018 filing season. For many people who are in a high-tax area, this deduction cap could be an uncomfortable hit.
On average in the 2014 tax year, New Yorkers filed an average of $21,000 in SALT deductions, and 30 to 40 percent of filers itemized their tax returns. Other states, including California, Maryland, Massachusetts, Rhode Island, Illinois, New Jersey and Connecticut, all have average SALT deductions that exceed $10,000 per year.
This filing season: There’s no way around it: If you paid more than $10,000 last year in state and local taxes, you won’t be able to deduct the full amount.
Planning ahead: If you’ve been planning an out-of-state move to a lower tax area, now might be the time!
But, all kidding aside, you don’t have to pack your bags and hit the road to find a better tax situation. Instead, try focusing on other deductions you may qualify for. Implementing long-term tax planning strategies can help you to reduce your taxable income in ways that make up for the capped SALT deduction.
Homeowners who have itemized their deductions in the past may be feeling nervous, and a little frustrated, heading into this filing season. The good news is that there’s a light at the end of the tunnel. An increase to the standard deduction nearly doubled the total amount taxpayers can claim. The new limits are:
In many cases, this could mean that taking the standard deduction allows you to save more money on your taxes than itemizing.
This filing season: Talk to your certified public accountant (CPA) about potentially taking the standard deduction — even if you’ve itemized in the past. The new limits may be increased to the point where the standard deduction would save you more money on your taxes this year.
Planning ahead: Strategies that increase your deductions in certain years (like front-loading charitable giving) can help you alternate which years you take advantage of the higher standard deduction and which years you itemize your return. Thinking ahead—and speaking with a Certified Financial Planner (CFP®) professional to come up with a strategy—allows you to make empowered money decisions that saves you more of your hard-earned money.
Rianka R. Dorsainvil, CFP ® is the Founder and President of Your Greatest Contribution (YGC), a virtual, fee-only comprehensive financial planning firm dedicated to serving entrepreneurs, first-generation wealth builders and thriving professionals in their late 20’s, 30’s and 40’s. Rianka hosts 2050 TrailBlazers, a podcast aimed to directly address the lack of diversity in the financial planning profession by engaging industry experts and leaders in conversation to encourage cultural awareness, cultural perspective, and ways to make a measurable impact.