Pres. Donald Trump’s new tax plan bears substantial implications for homeowners and their taxes, even though the Trump tax plan details are still being worked out. As of the time of this publication, both the House and Senate have passed their own versions of tax reform, but the two houses need to have a conference committee to work out the Trump tax plan details, and then each house must pass a conference committee bill. The President must then sign the bill into law.
So, there could be substantial changes before the new tax laws take effect. For example, both bills include variations on the Trump tax plan brackets, but they vary widely. Read on to learn what each chamber of Congress has approved thus far and how you can maximize your home loan tax benefits and other tax perks of owning a home before and after the changes take effect.
1. Plan for Reduced Value of Itemized Deductions
Many homeownership tax breaks, including mortgage interest and property taxes, are classified as itemized deductions. To claim these deductions, you must forgo the standard deduction. For 2017, the standard deduction for joint filers is $12,700, and single filers have a deduction of $6,350. That means that if you’re married, once your itemized deductions — which also include charitable contributions, state and local income taxes and medical expenses — exceed $12,700, you start saving money compared to the standard deduction. For example, if your itemized deductions total $18,700, your taxable income is reduced by $6,000 more than it would be reduced by the standard deduction.
Both the House and Senate bills drastically increase the standard deduction, which means you’ll need a lot more in itemized deductions to save more money than you’ll save by taking the standard deduction. The House bill bumps the standard deduction to $24,400 for joint filers and $12,200 for single filers. So although certain homeownership expenses might continue to be tax-deductible, you might not be able to take advantage of the savings.
2. Pay Mortgage Interest Before 2017 Ends
Because of mortgage amortization, each mortgage payment you make includes part interest and part principal, unless you have an interest-only mortgage. You deduct mortgage interest in the year you pay it, not the year that it accrues, so you can boost your mortgage interest deduction by moving the payment you would usually make at the beginning of January to the end of December.
For example, say that your monthly mortgage payment would usually be due Jan. 3, 2018. If you pay it on Dec. 31, 2017 instead, you can deduct the interest portion on your 2017 tax return. That way, if you’re not able to itemize your deductions in future years, you’ve at least maximized this year’s deductions.
Know the difference between mortgage interest and mortgage annual percentage rate: Mortgage interest is the amount your lender charges for lending you money. The APR, on the other hand, represents the total fees you pay each year on your loan, including mortgage interest, points and any other fees associated with your loan. Your mortgage interest is tax-deductible — even reverse mortgage interest — if you’ve repaid your loan in full. The APR itself is not deductible, but you might deduct some of the fees included in it, like mortgage interest.
3. Close on Home Sales to Qualify for Exclusion
Under current tax law, you can exclude up to $250,000 — or $500,000 for married couples — of gains from the sale of your home if you own the home for at least two of the previous five years and use it as your primary residence for at least two of the last five years. But under the Senate bill, the time periods you must meet to claim the exemption are five of the last eight years for sales starting in 2018. So, if you’re looking to sell a home and you meet the shorter requirement but not the longer requirement, close by the end of the year to take advantage of the tax break.
4. Move Before the End of the Year
Whether you’re buying a first home or transitioning between homes, you can deduct qualifying moving expenses you pay in 2017 even if you take the standard deduction rather than itemize. To qualify, your move must relate closely to the start of work, your new workplace must be at least 50 miles farther from your old home than your old workplace was, and you must work full-time for at least 39 weeks during the first year you move. Self-employed individuals must work 78 weeks total in the first two years after they move. Both the House and Senate bills repeal the moving expenses deduction in 2017 and beyond, so if you have a choice, pay the moving expenses before the end of the year.
5. Budget for a Potentially Lower Interest Deduction When House Shopping
Under the tax plan approved by the House, the mortgage interest deduction would be capped at the mortgage interest on the first $500,000 of mortgage debt. If you have an existing mortgage, it will be grandfathered in under the old rules, which permit deducting the interest on the first $1,000,000 of mortgage debt. But if you are looking to purchase in 2018 and beyond, adjust your budget to account for the fact that you might not be able to deduct as much income.
6. Account for Caps on Deductible Property Taxes
Homeowners with hefty property taxes could at least take solace in the federal income tax deduction on the full property tax payment. Under both the House and Senate versions of the Trump tax plan, the property tax deduction is limited to $10,000. Plan for a bigger tax bill in 2018 if you’re used to deducting more than that.
7. Expect Tax Increases If You Claim Many Personal Exemptions
Personal exemptions — which are deductions you claim for yourself, as long as you are not someone else’s dependent; your spouse, if filing jointly; and anyone you claim as a dependent — are eliminated under both the House and Senate bills. For the 2017 tax year, you reduce your taxable income by $4,050 for each exemption you claim, but this tax break will be gone in 2018.
8. Consider a Home Office
The deductions related to home offices are not limited under the proposed tax laws like mortgage interest or real estate taxes will be, said Tom Wheelwright, CPA and CEO of ProVision. If you meet the requirements to have a home office, consider segregating a room in your home to serve as a home office. That way, you can deduct the portion of interest and real estate taxes allocated to that part of your home without the homeownership-related limitations. To qualify, the home office must be regularly and exclusively used for your business, and it must be the principal place where you conduct your business.
9. Prepay Deductible Items
In addition to mortgage interest, there are other itemized deductions that you could lose out on in 2018 if the total doesn’t exceed the much higher standard deduction. These include medical expenses, charitable contributions, private mortgage insurance and state income taxes. In addition, with Trump tax rates scheduled to go lower, the deductions will be worth more this year, said Richard M. Prinzi, Jr., CPA and co-founder of F-Sharp Tax Management Services.
10. Plan to Offset Tax Liabilities With an Increased Child Tax Credit
If you bought your home to have a place to raise your family, you will see some tax relief in the proposed law. Both the House and the Senate bills increase the child tax credit. In the House bill, the maximum goes up from $1,000 to $1,600, and in the Senate bill it increases to $2,000. But only the first $1,000 of the credit is refundable under both the House and Senate bills, which means that if you don’t owe taxes because of other deductions and credits, you could miss out on the additional tax breaks under the plans for Trump taxes.
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