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Tax Reform Brings Significant Changes for Homeowners

The recently passed 2017 Tax Cuts and Jobs Act, which was passed into law on December 22, 2017, has brought significant changes for homeowners. Below are the key tax provisions that may impact your personal tax situation:

Home Mortgage Interest Deduction
The itemized deduction for mortgage interest is now limited to underlying debt of up to $750,000 ($375,000 for married filing separately). The prior limit of $1 million continues to apply for:
*Debt incurred on or before December 15, 2017, and
*Refinancing existing debt that was incurred before December 15, 2017
There are additional parameters for debt incurred, refinanced or contracted prior to December 15, 2017.

Interest on Home Equity Debt

Under prior law, homeowners could deduct interest paid on home equity debt. There was a cap of $100,000 on the underlying debt and the proceeds could be used for any purpose. Now, that debt is only deductible if the loan proceeds are used to buy, build or substantially improve the taxpayer’s home (such as installing a new kitchen). For example, the interest would not be deductible if the loan were used to pay off credit cards.

State & Local Tax Deduction
The itemized deduction claimed on Schedule A for state and local taxes is now limited to $10,000 ($5,000 for married filing separately) on the aggregate of the following items.
*State and local property taxes
*State and local income taxes OR sales taxes
(There was no limit under prior law)

The new $10,000 limit is a big change in states with high taxes, such as California and New York. However, state and local taxes are an alternative minimum (AMT) tax adjustment and many taxpayers lost the value of the deduction if they paid AMT in the past. To the extent state and local taxes apply to the taxpayer’s business, taxpayers should remember to deduct those taxes on Schedules C, E or F and not on Schedule A. Also, when buying or selling a home, taxpayers can consider negotiating who covers the real estate taxes.

It may be somewhat of a relief to know that there are some tax reform measures in place to help offset these (and other) lost deductions. Overall tax rates have been reduced and the standard deduction for taxpayers NOT itemizing deductions on Schedule A is increased to $24,000 for married filing joint, $18,000 for head of household and $12,000 for other filing statuses

Your HW and Associates accountant will determine how these and other new tax laws may impact your personal tax situation. Please don’t hesitate to email or call us with any questions related to the new tax reform provisions.

April 9th, 2018

Posted in Featured,Tax

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