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This April, Don’t Be Fooled by the New Tax Law Changes

There’s nothing silly about taxes, and with the new Tax Law (TCJA) or Tax Cuts and Jobs Act, millions of Taxpayers are wondering which tax breaks they will still be able to use in 2018, and which ones have been eliminated.

We don’t want you to be played for a fool this April, so we put together a guide on what tax changes homeowners can expect to see this season. And while Tax Day isn’t a holiday that most Americans look forward to celebrating—but if you purchased a home last year, then you have a few new tax breaks to look forward to.

Before we get into all the details, it’s important to note that some changes were recently made to the tax laws through the Tax Cuts and Jobs Act. While the rules have changed, homeowners will still see plenty of tax benefits this season.

Here’s the breakdown on what you’re able to deduct:

First thing’s first: To qualify for these benefits, you will need to do an itemized deduction on your Federal Tax Return, not a standard deduction. A federal standard deduction is a fixed dollar amount that you can deduct from your taxable income and is based on filing status and age. The itemized deduction is a little bit more complicated, but It’s worth the extra time spent prior to filing your taxes.

Deduction 1: You mortgage interest on your primary residence
In a majority of cases, your mortgage interest is fully deductible. Under the old tax laws, homeowners could write off interest on up to a $500,000 loan for a single tax filer, or a $1 million loan if you file jointly. Under the new law, homeowners who purchased their home on or after December 15, 2017, can deduct interest on a qualified loan up to $375,000 if you file separately, and $750,000 if you file jointly. Keep in mind that the deduction applies to loans used to build, buy or substantially improve primary residences or second homes.

What if I prepaid interest?
According to the IRS, if you pay interest in advance for a period that goes beyond the end of the tax year, you must spread this interest over the tax years to which it applies. You can deduct in each year only the interest that qualifies as home mortgage interest for that year. However, there is an exception that applies to points, which we’ll discuss later.

How do I know how much I paid in interest?
You will receive a 1098 Form each year stating how much mortgage interest you have paid throughout the year. You or your CPA can use this number as the mortgage interest deduction amount to use on your tax returns.

Deduction 2: Mortgage interest on a second home
The interest you pay on a second home mortgage is also deductible under certain circumstances, so make sure you’re not missing out on an opportunity here.

If you have a second home that you do not rent out during the year, you can deduct the interest you pay on your mortgage, up to $750,000 ($375,000 if married filing separately).

What if I rent out my second home?
If you rent out your second home during the part of the year, it could still qualify. The rules say you need to use the home more than 14 times per year OR more than 10 percent of the number of days that the house is rented out per year—whichever is longer.

Deduction 3: Home Equity Line of Credit Loans (HELOCS)
One common misconception is that interest paid on home equity loans, home equity lines of credit (HELOC) or second mortgages is no longer deductible. The new law still allows the deduction for interest paid on home equity loans and lines of credit take out on or after December 15, 2017, as long as they are used to build, buy or substantially improve the taxpayer’s home which secures the loan.

Deduction 4: Property Taxes
Prior to 2018, you could deduct an unlimited amount of state and local income and property taxes or you could choose to deduct your state and local general sales taxes paid instead. Under the new Law, this deduction will be limited to a total amount of $10,000 if using married filing jointly status. This deduction can be for either state and local income and property taxes or state and local general sales taxes paid. Your deductible property taxes include those paid at closing when buying the home, as well as the taxes paid to your city or county each year.

Most homeowners pay property taxes as part of their monthly loan payment. The money paid towards property taxes goes into an escrow account for payment. If you pay through your mortgage payment each month you are only able to deduct it after the lender has paid for it on your behalf.

Can I deduct Private Mortgage Insurance?
If you purchased a conventional loan or an FHA 20% down, chances are that you’re paying private mortgage insurance or a mortgage insurance premium each month, respectively. This monthly insurance payment typically ranges from $85-$200 per month, depending on your loan amount.

Under previous laws, homeowners with a joint household income of less than $109,000 were eligible to deduct private mortgage insurance. Unfortunately, under the new Tax Cuts and Jobs Act, homeowners are no longer able to deduct private mortgage insurance premiums.

Can I deduct points?
Some homebuyers pay “points” that are expressed as a percentage of your loan amount. Points are also known as discount points in the mortgage industry and they are fees paid directly to a lender, such as TowneBank Mortgage, at closing in exchange for a reduced interest rate which in turn reduces your monthly payments. You can deduct points the year you paid them, as long as the points were paid to your primary residence, and the payment of points is an established business practice in your area.

Can I deduct moving expenses?
Only active-duty military members are eligible to deduct their moving expenses.

The information contained herein (including but not limited to any description of TowneBank Mortgage, its affiliates and its lending programs and products, eligibility criteria, interest rates, fees, and all other loan terms) is subject to change without notice. This is not a commitment to lend.

*TowneBank Mortgage is not a tax consultant. Contact your tax advisor for more details.

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