What American Homeowners Need To Know About New Tax Laws

Major changes to tax laws will take effect on January 1. These changes will impact a number of Americans, especially those who own homes. Decisions about whether to own or rent, what to do with home equity, and retirement/college planning are all at stake.

Here's what property owners can look forward to in 2018:

1. $10,000 TAX CAP FOR PROPERTY TAX DEDUCTIONS

There will be a cap of $10,000 for property tax deductions going forward in 2018. Currently, those who own homes in states with high taxes--including California, New Jersey, and New York--have, until now, been able to file for an unlimited number of property tax deductions under the SALT (State And Local Tax) deduction. This deduction allows homeowners to write off the total amount due in state income taxes as well as local property taxes.

Under the new law, however, deductions will be capped at $10,000 total. Over four million Americans pay more than that each year in property taxes, meaning a large number of people will be impacted once the new law takes effect in 2018.

For those looking for a bit of a break going forward, you may want to consider paying some or all your property taxes due for 2018 before the end of the year. What this does is allow you some additional time to make budget adjustments for 2019 before the new tax law goes into place.

Just remember that you will not be able to do this for your state income taxes, as the new tax laws forbid you to make prepayments on those.

2. $750,000 LOAN LIMIT TO MORTGAGE INTEREST DEDUCTIONS

Many homeowners have taken advantage of the ability to apply deductions to mortgage interest payments, allowing them to save money over time. But with rising housing prices and new tax laws, fewer borrowers will be able to take advantage of mortgage interest deductions.

Until now, homeowners could deduct interest of up to $1 million on home loans. But in 2018, that figure will be reduced to $750,000. Those with existing mortgages are exempt from this change; however, for those applying for home loans in 2018 and after, you may want to consider this law as you look for homes.

While dropping the limit for mortgage interest deductions by 25 percent will affect a fair number of borrowers, lawmakers have been trying to get rid of this deduction for a number of years now as it's mainly used by the wealthy to claim additional tax breaks. This is mainly a function of how tax deductions are structured.

Tax deductions matter most for those in higher tax brackets. The more you pay in taxes, the more you seek to itemize your expenses. In other words, the more deductions you are able to claim, the more you benefit. On the other hand, deductions like these can harm the wealthy, too, since they tend to take out more expensive home loans.

Areas with high costs of living like San Francisco and Boston may be particularly impacted by this change. Cities with expensive housing require those earning even middle-of-the-road salaries to take out increasingly inflated loans, giving them greater incentive to itemize their loans in order to absorb some of the costs.

3. NO MORE DEDUCTIONS FOR INTEREST ON HOME EQUITY LOANS

Many homeowners have relied on home equity loans for additional income during lean times. Loans worth up to $100,000 could qualify for interest deductions under the old laws. But in 2018, property owners will no longer be able to claim the interest on home equity for deductions. What's more is that homeowners with home equity loans won't be allowed to write off the interest in 2018 when the new law takes affect.

A number of American homeowners will be impacted by the removal of these deductions after the New Year. So the time to plan ahead is now: consider rethinking your budget if any of these changes apply to you. You may want to think about taking advantage of other money saving opportunities, like diversifying your investment portfolio or selling property entirely. While not everyone agrees with or likes the changes, they are here to stay and they will take effect very soon.






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