It’s almost the end of the year, which means tax time is just around the corner. Let’s talk about some of the home-related deductions you’ll want to make sure to understand and keep track of. The Federal tax code overhaul (colloquially known as TCJA) is now in effect for 2018. The changes affected some rules for homeowners, so read on to learn about how they might affect you.
Mortgage and Home Equity Loan Interest
One of the most popular tax deductible items isn’t going anywhere, but it’s had some important changes. If you bought your home prior to 2018, the full amount of your mortgage interest is deductible on your Schedule A – for loans of one million dollars or less. Starting in 2018, this limit is being lowered to $750,000. So if you have a new home loan of $900,000, only the interest on $750,000 is deductible, whereas last year you would have been eligible to deduct the full amount.
Home equity loans and lines of credit are another major avenue of paying interest on a home loan. Effectively in 2018, this interest is deductible only if the loan is used to “buy, build or substantially improve” the taxpayer’s home. Make sure to talk to your financial advisor or tax preparer about the kind of improvements you might use a HELOC (Home equity line of credit) to do, because not all home repairs or investments count as ‘substantially improved’ – so confirm before you assume that borrowing will be deductible!
Any other uses for home equity – paying tuition, consolidating consumer debt – are no longer tax deductible.
Perhaps you were one of the taxpayers visiting your city or town hall at the end of 2017 to pay forward on your property taxes. Given that we’re almost a year later, you may have forgotten why you did that! It has to do with what’s called the SALT deduction, or state and local property taxes.
Under the TCJA tax changes, state and local property taxes are still deductible, but limited to no more than $10,000 per year. For those who live and work in Massachusetts, this might put a serious crimp on your deductions. If you pay $12,000 in property taxes and $7,000 in income taxes – you’ll only be able to deduct $10,000 of this $19,000 you’ve paid.
It’s a change, but it’s not a reason to move! Many states are looking at creative mechanisms to re-categorize property tax payments in such a way that may avoid the SALT limitations – we’re keeping an eye on you, California, to see if you find a solution!
Prior to 2018, renters and homeowners both had the opportunity to deduct costs related to a home office space—as long as your home office was inside your home and used ‘regularly and exclusively’ for business activities. This definition applied to small business owners, self employed contractors, and regular employees who worked one or more days from home.
For 2018 going forward, this deduction is no longer available to regular employees who work at home – it’s only available to those who are self- employed. Again – it’s worth it to check with your financial advisor or tax preparer if you’re not sure – no need to track expenses if they’re not deductible.
If you do have a home office, any expenses related to your home that can’t be separately designated by room are proportionally deductible: rent, mortgage interest, utilities, etc. If you have an expense that’s related only to the office, like a landline phone, that entire amount is deductible.
The cost of moving can be substantial – and some employers used to offer reimbursement of moving expenses as a tax-free fringe benefit. Others who paid for their own moves, as long as it was for work, were able to deduct the expenses of moving. All tax perks related to moving expenses have been eliminated for 2018 going forward.
If you make energy efficient investments in your home: solar electric, solar water, geothermal heat pump – there is a tax credit (money right back in your pocket) to cover a part of the costs associated with these improvements. This credit was renewed through 2019.
Tax code changes every year, but the changes for 2018 were part of the largest tax code overhaul in 30 years. We expect to see continued adjustments to the tax code, and likely some outcomes from ‘letter rulings’ that may affect your taxes as a homeowner going forward. Be sure to do your research and be in touch with professionals to help answer your questions along the way.