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The Tax Cuts and Jobs Act - What it Means for Homeowners

August 13, 2020

Tax Rate Reductions

  • The new law provides generally lower tax rates for all individual tax filers. While this does not mean that every American will pay lower taxes under these changes, most will. The total size of the tax cut from the rate reductions equals more than $1.2 trillion over ten years.
  • The tax rate schedule retains seven brackets with slightly lower marginal rates of 10%, 12%, 22%, 24%, 32%, 35%, and 37%.
  • The final bill retains the prior-law maximum rates on net capital gains (generally, 15% maximum rate but 20% for those in the highest tax bracket; 25% rate on “recapture” of depreciation from real property).

Tax Brackets for Ordinary Income Under Prior Law and the Tax Cuts and Jobs Act (2018 Tax Year) Single Filer

Prior Law Tax Cuts and Jobs Act
10% $0-$9,525 10% $0 - $9,525
15% $9,525 - $38,700 12% $9,525 - $38,700
25% $38,700 - $93,700 22% $38,700 - $82,500
28% $93,700 - $195,450 24% $82,500 - $157,500
33% $195,450 - $424,950 32% $157,500 - $200,000
35% $424,950 - $426,700 35% $200,000 - $500,000
39.6% $426,700+ 37% $500,000

Tax Brackets for Ordinary Income Under Prior Law and the Tax Cuts and Jobs Act (2018 Tax Year) Married Filing Jointly

Prior Law Tax Cuts and Jobs Act
10% $0 - $19,050 10% $0 - $19,050
15% $19,050 - $77,400 12% $19,050 - $77,400
25% $77,400 - $156,150 22% $77,400 - $165,000
28% $156,150 - $237,950 24% $165,000 - $315,000
33% $237,950 - $424,950 32% $315,000 - $400,000
35% $424,950 - $480,050 35% $400,000 - $600,000
39.6% $480,050+ 37% $600,000+

Exclusion of Gain on Sale of a Principal Residence

  • The final bill retains prior law. A significant victory in the final bill that NAR achieved.
  • The Senate-passed bill would have changed the amount of time a homeowner must live in their home to qualify for the capital gains exclusion from 2 out of the past 5 years to 5 out of the past 8 years. The House bill would have made this same change as well as phased out the exclusion for taxpayers with incomes above $250,000 single/$500,000 married.

Mortgage Interest Deduction

  • The final bill reduces the limit on deductible mortgage debt to $750,000 for new loans taken out after 12/15/17. Loans existing on 12/15/2017 of up to $1 million are grandfathered and are not subject to the new $750,000 cap. Neither limit is indexed for inflation.
  • Homeowners may refinance mortgage debts existing on 12/15/17 up to $1 million and still deduct the interest, so long as the new loan does not exceed the amount of the mortgage being refinanced.
  • The final bill repeals the deduction for interest paid on home equity debt through 12/31/25. Interest is still deductible on home equity loans (or second mortgages) if the proceeds are used to substantially improve the residence.
  • Interest remains deductible on second homes, but subject to the $1 million / $750,000 limits.
  • The House-passed bill would have capped the mortgage interest limit at $500,000 and eliminated the deduction for second homes.

Deduction for State and Local Taxes

  • The final bill limits the amount of state and local tax deduction (including property taxes) to $10,000. This $10,000 limit applies for both single and married filers and is not indexed for inflation.
  • At the beginning of the process, both the House and Senate bills would have completely eliminated the deduction for state and local taxes. The final bill, while much less beneficial than prior law for many, represents a significant improvement over the original proposals.

Standard Deduction

  • The final bill provides a standard deduction of $12,000 for single individuals and $24,000 for joint returns. The new standard deduction is indexed for inflation.
  • By doubling the standard deduction, Congress greatly reduced the value of the mortgage interest and property tax deductions as tax incentives for homeownership.Congressional estimates indicate that only 12-13% of filers will now be eligible to claim these deductions by itemizing, meaning there will be no tax differential between renting and owning for almost 90% of taxpayers.

Repeal of Personal Exemptions

  • Under the prior law, tax filers could deduct $4,150 in 2018 for the filer and his or her spouse, if any, and for each dependent. These exemptions have been repealed in the new law.
  • This change alone greatly mitigates (and in some cases entirely eliminates) the positive aspects of the higher standard deduction.

To illustrate how the above-listed changes can affect the tax incentives of owning a home for a first-time buyer and a middle-income family of five, please see these examples:

Example 1: Single Buyer

Example 2: Middle-Income Family of Five

 

Deduction for Medical Expenses

  • The final bill retains the deduction for medical expenses (including decreasing the 10% floor to 7.5% floor for 2018).
  • The House bill would have eliminated the deduction for medical expenses.

Child Credit

  • The final bill increases the child tax credit to $2,000 from $1,000 and keeps the age limit at 16 and younger. The income phase-out to claim the child credit was increased significantly from ($55,000 single/$110,000 married) under prior law to $500,000 for all filers in the final bill.

Student Loan Interest Deduction

  • The final bill retains prior law, allowing deductibility of student loan debt up to $2,500, subject to income phase-outs.
  • The House bill would have eliminated the deduction for interest on student loans.

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