TCJA Changes to the Deduction for Mortgage Interest for 2018



How much mortgage interest can I deduct on my schedule A, itemized deductions, under the new tax law, the Tax Cuts and Jobs Act (TCJA)? That is a great question but the TCJA limits the loan size of which you can deduct interest on and not on the interest amount. I know, that is a challenge to wrap your mind around and it raises more questions.

Before we get to those questions we need to address the new standard deduction first as those question may be irrelevant now for many taxpayers.

Standard Deduction

Why is the new standard deduction relevant? Because it is now much higher and as a result a much higher percentage of taxpayers will be better off taking the standard deduction rather than itemizing. The new standard deductions for 2018:

Married Filing Joint and Surviving Spouse filers  $24,000
Head of Household  $18,000
Single and Married Filing Separately  $12,000

Additional Standard Deduction
Elderly (65 or over) or Blind MFJ  $1,300
If Unmarried  $1,600

Taxpayers need only be concerned about the limitations discussed below if their total itemized deductions could exceed their standard deduction. However, if your standard deduction is higher than your itemized deductions you may be still be able to deduct a portion of your mortgage interest if you are able to claim a home office deduction for your business.


Mortgage Interest Deduction Limits Under the TCJA

Loans Taken Out On or After December 17, 2017

For loans taken out on or after December 17, 2017 you are able to deduct interest on loans up to $750,000 of mortgage debt. For those filing Married Filing Separate the loan amount limit is $375,000. According to the IRS, "the limits apply to the combined amount of loans used to buy, build or substantially improve the taxpayer's main home and second home."

Whatif t he combined amount of loans used to buy, build or substantially improve the taxpayer's main home and second home exceeds the loan amount limit? According to an example given by the IRS, "a percentage of the total interest paid is deductible (see Publication 936). As of the time of writing this post, Publication 936 is not yet available for 2018.

The 2017 version of Publication 936 explained the calculation of deductible mortgage interest calculating it as a percentage of the total qualified home mortgage interest paid. So you were not able to take all of interest on the loan with a higher interest rate and a portion of interest from the loan with a lower interest rate.

Loans Taken Out Before December 17, 2017

The limits on loan amounts taken out before December 17, 2017 are $1,000,000 and $500,000 for those using the Married Filing Separate filing status.

Home Equity Loans and HELOCs

The new tax law did away with the mortgage interest deduction for Home Equity Loans and HELOCs unless they were used to improve your property. If you did take out one of these loans to improve your home the deductibility of this interest is still based on the limits discussed above.

Additionally, you will want to keep good records of the use of the proceeds from these loans to improve your home in case of an audit.

Bunching Itemized Deduction Strategy

To increase your itemized deductions and lower your taxes you could make extra payments in 2018 to increase your itemized deductions. You may be able to make your January mortgage payment early and deduct the portion of that payment which is for your interest for December of this year. In addition, if you are over the threshold for deductible medical expenses you could make those doctor visits before year end. Finally, you could also make extra charitable contributions before year end. Realize these strategies are best used if you are close to the standard deduction and use these strategies to take a higher itemized deduction in one year and take the standard deduction the following year. Otherwise with just itemized deductions you are taking a deduction this year that will lower your deductions the following year. Of course you probably want to lower this years taxable income as much as possible but not necessarily, it depends on what you expect next year to be like from a tax standpoint. It is best to discuss this strategy your "tax guy", and I would be happy to be your "tax guy".

You probably noticed that I left out state and local taxes. That is because starting in 2018 that part of your itemized deductions is capped at 10,000 a year. For now at least.

Year End Help

I have regular year end conversations about this topic with many of my clients starting toward the end of their third quarter. Yes I prefer to talk to my clients throughout the year, and not just at tax time. While I charge more for tax planning, it enables me also to provide more value for you rather than merely preparing tax returns. This would enable you to get real value that affects your bottom line. So if you want a CPA that gives you more than tax returns then email me using my contact information below to setup an appointment to discuss your situation.


Jeff Haywood, CPA
The CPA Superhero
jeff.jhtaxes@gmail.com
217-923-8007
twitter.com/thecpasuperhero




References:

What the New Tax Law Will Do To Your Mortgage Interest Deduction - MarketWatch

Interest on Home Equity Loans Often Still Deductible Under New Tax Law - IRS

Mortgage Tax Deduction Calculator - Bankrate 

How the New Tax Law Will Impact Your Housing Costs - Forbes





Be careful when reading about tax law and its application, including my articles, because the wording and definitions are such a challenge and are influenced by writers perspective, specifically his own clients situations that he is mindful of and other situations the writer is not thinking of. The point is talk to your CPA about your situation and circumstances and don't rely on or make conclusions based on articles you read, including articles form irs.gov, because concepts and definitions are not very clear, and of course, they are subject to change. Now is the time to be having discussions about your situation and developing strategies for you and your business. Again, contact me using my information above to discuss your situation. I help business owners all over the U.S. and in foreign countries with their tax returns.

Should I Pay My Real Estate Taxes Before the End of the Year? The TCJA Implications


My clients are asking if they should pay their real estate taxes this year or would it benefit them to wait until next year to pay two years of real estate taxes in one calendar year. It is a great question and the answer has really changed this year based on the new tax law, Tax Cuts and Jobs Act (TCJA).

New Limit of $10,000 Per Year for the Deduction of State and Local Taxes

The question is should I double dip by paying for two years of my real estate taxes in one year? Unless your real estate taxes are relatively low the answer will like be no, now that we have the new TCJA. This new tax law limits the deduction for state and local taxes to $10,000 annually starting with the 2018 calendar year.

The Deduction for State and Local Taxes

For the deduction on schedule A of state and local taxes, the taxpayer chooses between state sales tax and state income taxes. In addition to those taxes, taxpayers can deduct other state and local taxes like property taxes. But again, the new limit for this deduction is now $10,000 per year.

So unless your real estate taxes were less than $5,000 a year it is probably not worth paying for two years worth of taxes in one year. There are additional factors that you will also need to take into consideration, like the changes to the standard deduction amounts.

Impact of a Higher Standard Deduction

Beginning in 2018 there will be no deductions for exemptions and the standard deduction amount will be significantly higher. For 2018 the standard deduction for a single person and those filing married filing separate will be $12,000. For Head of Household the deduction will be $18,000 and for those filing Married Filing Jointly and for Surviving Spouse the deduction will be $24,000. The additional standard deduction for the aged or blind will be $1,300 and $1,600 for unmarried taxpayers.

The higher standard deduction will mean that fewer taxpayers will itemize their deductions on schedule A so real estate taxes will not be relevant for many taxpayers now.

What This Means For You

Of course, you want to know if there is a way around this, especially if you live in a state with higher taxes. Because there is not the same kind of limit on charitable contributions (for now) some have tried to find a way to make their real estate or other state taxes be classified as charitable contributions. However, the IRS has addressed this issue stating:

an entity eligible to receive tax deductible contributions must reduce their charitable deduction by the amount of any state or local tax credit the taxpayer receives or expects to receive.

However, there is an exception:

The proposed regulations provide exceptions for dollar-for-dollar state tax deductions and for tax credits of no more than 15 percent of the payment amount or of the fair market value of the property transferred. 

So basically there is no realistic way around the new limit on this deduction on your personal return.

This Limitation Does Not Apply for Business Deductions

There is no such limitation for businesses deducting real estate taxes. However, keep in mind that business deductions must be ordinary and necessary for the business to operate. So there are some discussions that you should be having with your CPA about the new tax law.

Strategy

As mentioned above there is no limit for charitable contributions, so you might want to consider the bunching strategy for charitable contributions instead of for state and local taxes. How would this work? Let's say you are close to the standard deduction in a typical year for you but you make significant charitable contributions. In this case, from a tax standpoint, you might consider bunching your charitable contributions into every other year if they take your deductions  over the standard deduction. For example if you are single and typically make more than $6,000 a year in charitable contributions but you are not over the standard deduction, then you could double up your charitable contributions in one year and not make any contributions the next and then alternate between taking the standard deduction one year and taking itemized deductions the next year. This example would work for married taxpayers but the deduction amount would need to doubled.

This is a strategy that charitable organizations may not like but it may be better than you making smaller donations because of the lack of a tax benefit.

Year End Help

I have regular year end conversations about this topic with many of my clients starting toward the end of their third quarter. Yes I prefer to talk to my clients throughout the year, and not just at tax time. While I charge more for tax planning, it enables me also to provide more value for you rather than merely preparing tax returns. This would enable you to get real value that affects your bottom line. So if you want a CPA that gives you more than tax returns then email me using my contact information below to setup an appointment to discuss your situation.


Jeff Haywood, CPA
The CPA Superhero
jeff.jhtaxes@gmail.com
217-923-8007
twitter.com/thecpasuperhero




References:


The State Income Tax Deduction on Your Federal Return - The Balance

The IRS Throws Salt into the SALT - Deduction - Limit Wound - Forbes

Be careful when reading about tax law and its application, including my articles, because the wording and definitions are such a challenge and are influenced by writers perspective, specifically his own clients situations that he is mindful of and other situations the writer is not thinking of. The point is talk to your CPA about your situation and circumstances and don't rely on or make conclusions based on articles you read, including articles form irs.gov, because concepts and definitions are not very clear, and of course, they are subject to change. Now is the time to be having discussions about your situation and developing strategies for you and your business. Again, contact me using my information above to discuss your situation. I help business owners all over the U.S. and in foreign countries with their tax returns.

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