Changes in Rules for Home Tax Deductions
Homeowners in the United States should be aware of changes to home tax deductions. These changes are important to understand for when they prepare their 2018 tax returns during the 2019 tax preparation season. They stem from the federal Tax Cuts and Jobs Act of 2017. Changes to home tax deductions were implemented to reduce the ability of homeowners to deduct interest on Home Equity Lines of Credit (HELOC) Loans. When HELOC loans are not used for home purchases, building, or substantial improvements, the interest on these loans will no longer be deductible. There are also dollar limits on the total qualified residential loan balances allowable for deductions, an increase in the standard deduction, and a $10,000 limit on the federal deduction of state and local taxes.
What is Home Equity?
Home Equity is the portion of a home that the owner actually “owns” either through paying down their mortgage or growth in the property value of the home. Homeowners who build equity in their home can help increase their net worth. As a result, home equity may offer homeowners a useful source of funds to borrow from in times of need, such as during a home renovation.
Internal Revenue Service (IRS) Issues Clarification for HELOC Loans
The IRS issued a clarification on February 21 of this year in response to several questions from taxpayers and tax professions. IR-2018-32: Interest on Home Equity Loans Often Still Deductible under New Law describes several examples to demonstrate the effects of the new rule. Important points of clarification include the following:
- Interest on a home equity loan used to build an addition to an existing home is typically deductible
- Interest on a home equity loan used to pay personal living expenses, such as credit card debts, is not deductible
- The loan must be secured by the taxpayer’s main home or second home (known as a qualified residence)
- The loan must not exceed the cost of the home and meet other requirements
Additionally, the new tax reform law imposes lower dollar limits on mortgages in order to qualify for the home mortgage interest deduction. The IRS notes that starting in 2018:
- Taxpayers may deduct interest on $750,000 of qualified residence loans, down from the previous $1 million limit
- There is a limit of $375,000 for a married taxpayer who files a separate return. This is down from the previous $500,000 limit
- The new limits apply to the combined amount of all loans used to buy, build, or substantially improve the taxpayer’s main home and second home
Itemizations Must Exceed New Standard Deduction
To itemize for 2018 taxes, taxpayers must understand the impact of the new standard deduction. The tax reform law states that total home tax deductions must exceed the new standard deduction. The new standard deduction amounts are:
- $12,000 for singles
- $18,000 for heads of household
- $24,000 for married couples who file jointly
- $1,600 additional deduction for singles 65 and older
- $2,600 additional deduction for married couples both 65 and older
Limit on State and Local Tax Deductions
The tax reform law places a limit on the federal deduction of state and local taxes to only $10.000. Homeowners in areas of the United States which experience high taxes include those in the Northeast and the West Coast. As a result, these homeowners may experience an increase in their tax liability.
What Should Homeowners Do?
Homeowners planning to file for home tax deductions on their 2018 tax returns should be aware of the changes to allowable deductions on their HELOC loans. They should also be aware of the new lower dollar limits on qualifying mortgages imposed by the tax reform law. Homeowners should be aware of the requirement that deductions must exceed the new standard deduction if they plan to itemize. Homeowners in states with high taxes should be aware of the new $10,000 limit on federal deduction of state and local taxes. In all cases, homeowners should consult a qualified tax professional for guidance on this issue.
Global Mobility Solutions’ team of corporate relocation experts has helped thousands of our clients understand the importance of obtaining professional guidance when it comes to changing tax regulations. We can help your company understand how to communicate the potential impact of these changes to your new hires and transferees. This will ensure they have relevant information as it applies to their relocations.
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GMS is not a tax advisor and is only disseminating public information. You should always consult your own tax professional prior to making any decisions.