By now, you’ve probably filed your taxes, and if you haven’t, be prepared for a shock. The new tax laws have not affected most homeowners favorably, and itemized deductions are now a thing of the past. In this article, we are concentrating on how the standard deduction raise changes the tax benefit of owning a home in Washington State.
New Standard Deduction Rates
The 2018 standard deduction rates compared to previous years:
|Filing Status||New Tax Law||Prior to 2017|
|Married filing jointly||$24,000||+$11,300|
|Head of household||$18,000||+$8,650|
|Married filing separately||$12,000||+$5,650|
At first glance, it looks like a favorable change since most taxpayers usually take the standard deduction. However, under the old tax laws, many people, especially small business owners, recognized more substantial tax benefits from itemizing deductions.
Say Goodbye to Most Itemized Deductions
Over 45 million taxpayers used to itemize deductions (according to the IRS), and the average amount of itemized deductions was a whopping $28,645. Compare that to the new standard deductions, and you’ll see why we’re not all doing a happy dance. Under the new law, if your 2018 itemized deductions surpass the amount of the standard deduction above, then it won’t matter anyway. Even personal exemptions and the usual dependent exemptions no longer exist.
Home loan interest Deductions
When it comes to deducting home loan interest on your taxes, there’s good news and bad news. The good news is that mortgage interest on home purchase loans still remains deductible, but only up to $750,000. The bad news is that the deduction for interest on your home equity loans is now nondeductible, and there is no grandfathering exception for existing home equity loans. If you relied on a home equity interest deduction in the past, better grab a box of tissues and consider repaying that loan sooner than later.
State and Local Tax Deductions
There is another significant change concerning the deduction for state and local tax deductions. Before the new law, all property taxes paid was a potential itemized deduction as long as you didn’t opt for the alternative minimum tax. In Washington State, we could also deduct sales tax. The new law combines all these taxes together and then limits the deduction to a total of $10,000, regardless of your filing status, married or not. For high net worth individuals living in high-end luxury homes, this is a substantial blow to their tax liability.
According to industry analysts, for most homeowners, net after-tax housing costs will increase with the new tax law, but keep in mind that you still can deduct some of your property taxes and home mortgage income. You can’t do that when you rent instead of buy. Of course, to find out exactly how the new tax overhaul will impact you and your taxes, we recommend consulting with a tax professional. If and when you’re ready to refinance or purchase a home, we are here for all of your home loan needs.
Note: Opinions expressed are solely my own and do not express the views of my employer