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2018 taxes for homeowners: How 2018 tax law changes affect you

Peter Miller
The Mortgage Reports contributor

Tax law changes: Homeowners are likely paying more

You’re not alone if you think 2018 taxes for homeowners seem odd, scary, and costly. For a lot of people the Tax Cuts and Jobs Act of 2017 aka “tax reform” is proving to be anything but simple. Homeowners may be surprised when they see their final bill from Uncle Sam.

February 8th figures from the IRS show that a lot of taxpayers are getting grim news.

  • The total number of refunds were down 15.8 percent when compared with this time in 2018
  • The amount sent back to taxpayers fell 23.2 percent from a year ago
  • Average refunds dropped 8.7 percent, from $2,135 in 2018 to $1,949 so far in 2019

Homeowners seem to be bearing the brunt of tax reform. Projections on the new tax law estimate that property owners will pay an additional $668.4 billion in the next few years. This is due to eliminating deductions such as:

  • Taxes not paid or accrued in a trade or business (except for up to $10,000 in State and local taxes),
  • Interest on mortgage debt in excess of $750K,
  • Interest on home equity debt,
  • Non-disaster casualty losses

So what can you expect when you file 2018 taxes?

Thinking of a refinance? Shop top lenders here. (Oct 14th, 2019)

The standard deduction

The bright shiny object under tax reform has been the standard deduction. Between 2017 and 2018 the size of the standard deduction has markedly grown.

  • Single taxpayers: Increased from $6,350 in 2017 to $12,000 in 2018.
  • Married, filing jointly: Increased from $12,700 in 2017 to $24,000 in 2018.

Itemized deductions

Taxpayers are allowed to write off either their standard deduction or itemized deductions — but not both. It follows that logical taxpayers will take the larger deduction.

New tax law restricts some itemized real estate deductions.

Primary mortgage interest

First, you can only deduct mortgage interest paid on the first $750,000 of primary and vacation home debt. The old limit was $1,000,000.

In practice, this change will impact relatively few people.

Home equity loan interest

Second, new tax law affects the deductibility of home equity lines of credit (HELOCs). Before, the interest on $100,000 in home equity debt was fully deductible, regardless of how the money was spent.

You could use home equity to buy a car, pay college bills, or take a trip. Under tax reform, interest on home equity debt is only deductible if the money is used to make a “substantial improvement” in the property. Worse, the new rule applies to existing home equity debt. This means if $50,000 in home equity debt spent for antiques in 2016 remains outstanding the interest is no longer deductible.

Have fun with that paper trail.

Third, it used to be that taxpayers could write off both property taxes and state income taxes. Under tax reform, state and local taxes (i.e. property tax and sales tax) remain deductible. However, now these deductions cannot exceed $10,000.

Homeowners with high property and sales tax states like Washington, Louisiana, Texas and others will likely exceed this limit.

Mortgage insurance is no longer tax deductible

Though not part of the new tax law, the mortgage insurance deduction is also a thing of the past, for now.

Each year, Congress must reaffirm the deduction.

But Congress has yet to approve it for the 2018 tax year, according to Turbo Tax. Those who paid mortgage insurance in 2018 must file their taxes before the deadline, then, can submit an amended return if Congress approves the deduction later in the year.

For now, don’t count on this deduction to lower your tax bill as a homeowner.

The new realities

The implications of the new tax legislation are very clear. Most homeowners will elect to take the standard deduction. Instead of 21 percent of all households taking the mortgage write-off, the Tax Policy Center says that under tax reform only 4 percent of all households will claim it.

Owners in areas with a combination of high property values as well as steep state income taxes will likely see higher federal tax bills. Owners in areas with inexpensive housing and little or no state income taxes will likely see substantial tax reductions. A tax-inspired population shift is also likely.

One of the great advantages of homeownership, significant tax write-offs, will be lost for most taxpayers under tax reform and the difference between renting and owning is now much smaller.

Homeowners looking to refinance should shop the nation's top lenders here. (Oct 14th, 2019)