Since the final version of a $1.5 trillion tax reform bill was passed in December 2017, taxpayers across the nation have been trying to figure out how the changes will affect their lives and finances. As a mortgage company, we’ve done our best to keep homeowners informed about how specific provisions may impact them.
We’re not in the business of giving tax advice, though—we like to leave that up to the professionals (and encourage you to reach out to your financial advisor with any questions you have about the tax reform).
We did, however, speak with a few different Certified Public Accountants (CPAs) to get the inside scoop on what they’ve been hearing from property owners about the new tax bill, as well as how they’ve been helping them.
State and Local Taxes
In the past, taxpayers have been able to deduct all of their state and local taxes, including property taxes, state income taxes, and city income taxes. Under the new law, the max deduction for state and local property taxes combined is now $10,000. If you’re married, it’s capped at $5,000 for married couples filing separately.
“We’ve certainly had plenty of discussions with clients about the new tax law changes,” said James H. Guarino, CPA/PFS, CFP®, MST from Moody, Famigletti & Andronico, LLP. “Many of our client conversations occurred during the last few days of 2017. We ran year-end tax projections for clients to determine the benefits of paying their state income tax and real estate tax in 2017 instead of 2018. For some clients, it was very beneficial for them to pay their remaining 2017 state tax liabilities in December 2017 instead of waiting until 2018.”
Jeffrey S. Levine, CPA, MST from Alkon & Levine, PC added that there have been a few comments from clients about things they didn’t realize, including:
- That the $10,000 limit on state and local taxes is for all state and local taxes—income tax, excise tax, property tax, and sales tax. They assumed it was just real estate taxes.
- The limit of $10,000 does not apply to rental property or home office portions of taxes; it can be beneficial to still deduct those.
Mortgage Interest Deductions
It seems as though many homeowner concerns center around the mortgage interest deduction.
“The questions we got before year-end related to the new limitation of $750,000 and we explained that existing loans—put in place before December 15, 2017—that are secured by the property for which the funds were used for purchase or substantial improvement, would be subject to the ‘old’ ‘hard cap’ of $1 million,” said Mark Misselbeck, CPA, MST from Katz, Nannis + Solomon, P.C.
Guarino echoed a similar sentiment.
“Another concern for clients, especially up here in the Greater Boston area, is the amount of their home financing. The mortgage interest expense is now only deductible on $750,000 of ‘original acquisition indebtedness’ compared to the previous $1 million home mortgage threshold,” he said. “The cost of housing is very expensive and the reduced mortgage limit is a consideration for some of our clients as they contemplate their next home acquisition and evaluate the financing associated with it.”
Real Life Examples of How the New Tax Law Impacts Some Homeowners
Figuring out how taxes work is never completely cut-and-dry. Even when you think you know and understand all of the rules, it can be hard to imagine how they directly apply to your life. A couple of the CPAs quoted above provided a few examples of recent clients (names and identifying details have been changed) to give you a better understanding of how the 2018 tax law affects different individuals.
One woman, a salesperson with a house in Massachusetts and another in New Hampshire, wanted to renovate her Massachusetts property. She currently has a $200,000 loan on her New Hampshire house and a $450,000 loan on the Massachusetts primary home. She wanted to do $200,000 of work on the Massachusetts home, so she asked if she could refinance Massachusetts for $850,000 (to take advantage of lower rates for a primary home) and pay off New Hampshire, and do her construction.
Levine told her yes—but if she did, she would lose some of her interest deduction. First, her new loan would exceed $750,000; under the new law, she could not deduct all of her interest. However, since she is using home equity (from her increased value of the Massachusetts house) to pay off New Hampshire, that portion of her new loan would be equity debt and is not deductible under the new law.
Guarino had a meeting with a couple to discuss their 2018 tax planning. They typically report taxable income that is taxed at the highest tax bracket—39.6%, prior to 2018. The couple was excited to learn that the tax brackets had been adjusted for 2018, including the top tax bracket now being at a rate of 37%—an almost 3% tax savings. On $1 million+ of income, this equates to almost $30,000 in federal tax savings. Unfortunately for them, their itemized deductions have also been reduced as follows:
• The state tax deduction is now limited to $10,000. Previously, their state tax deduction was in excess of $100,000.• Their itemized deductions are eliminated. Previously, the deduction was approximately $25,000. They will still ultimately achieve tax savings in 2018 as a result of the lower top tax rate, but it will be less than the anticipated $30,000 savings they had hoped to receive.
A man in Cambridge, MA met with Levine in August 2017 to compare his current monthly rental cost of $3,500 to prospective homeownership. They worked out a maximum buy of $575,000 to $600,000 for him to look at. At that price—after his down payment, his mortgage, condo fee, and real estate taxes—what he paid would be comparable to his rent, after tax deductions for his taxes and interest.
At his tax appointment, the man told Levine he just made a $615,000 offer on a condo, but now was concerned that his tax benefits would not be as large as what they initially estimated in August due to the tax law change. The man was right.
First, while his entire mortgage interest would be deductible—since his loan was less than $750,000—his real estate tax no longer benefits him since his Massachusetts state income tax is over $10,000. And, since tax rates are lower, his effective tax savings on his deductions compared to rent are less than what they thought in August. However, Levine showed him that since he is single, he will still itemize (his deductions are greater than $13,000), and since overall tax rates are lower, he has more disposable cash from his income to go towards the loan.
It was close, but given his desire to own and the hot market in MA, it still made sense to move forward.
Wondering How You’ll Be Affected? Call Your CPA
Avoid a big surprise at this time next year by talking to a trusted financial professional now about your 2018 taxes. You are likely fixated on filing your 2017 taxes currently, but a little bit of preparation can go a long way in ensuring you’re ready to file next year.