Effects of the New Tax Plan for Homeowners

President Trump signed off on the Tax Cuts and Jobs Act (TJCA) last week after both the House of Representatives and Senate approved it. This sweeping tax reform package has been well-publicized in the media, but how do the changes potentially affect families and individuals the most? Below is a summary of those changes most likely to affect you as a Homeowner.

The new Tax Cuts and Jobs Act (TCJA) eliminates or restricts many itemized deductions beginning in 2018, and raises the standard deduction. Traditionally, about 30% of taxpayers have itemized deductions (on Schedule A) because their total itemized deductions were more than the standard deduction, based on their filing status. Taxpayers who itemize often include the self-employed and contract laborers. The net result of these changes is the expectation that LESS taxpayers will itemize under these new tax laws.

Also, it’s important to remember the distinction between a “tax deduction” and a “tax credit”. A “deduction” is a reduction of your taxable income—it is subtracted before the tax rate is applied to your taxable income. A “credit” is a reduction of the tax you actually have to pay—it is applied after the tax rate is applied to your taxable income. In other words, a “credit” is a dollar-for-dollar reduction of your tax liability, while a “deduction” only reduces your tax liability by the percentage of your tax bracket rate. The difference between deductions, exemptions and credit is that deductions and exemptions both reduce taxable income, while credits reduce tax.

· Increases Standard Exemption to $12,000 for individuals (up from $6350), $18,000 for Head of Household, and $24,000 for Joint filers.

· For new Homebuyers, for mortgages taken out after December 14, 2017, only the interest on the first $750,000 (down from $1 million previously) of mortgage debt is deductible. This only applies for tax-payers who itemize (versus taking the standard deduction). So, if you take out a mortgage of less than $750,000 after December 14, 2017, or if your mortgage is more than $750,000 but you took it out before that date, you won’t lose any of your interest deduction. Of course, if for other reasons you can’t itemize, your otherwise deductible mortgage interest will have no effect on reducing your federal tax.

· Families can only deduct up to $10,000 in local property and state and local income taxes. Again, this only applies for taxpayers that itemize.

· Interest on home equity loans will no longer be deductible after 2017. This affects interest on all home equity loans used for purposes other than to improve the current home, even if the loan was taken out before December 15, 2017.

· New bill keeps current deductions for student loan interest, and tuition waivers for grad school students remain tax-free.

· Eliminates individual penalty if you don’t have health insurance.

· Taxpayers can claim a $2000 (up from $1000) credit for each qualifying child under the age of 17

· One of the most noteworthy changes is the adjustments to the federal tax brackets. The GOP kept the seven brackets intact but changed the income levels and rates at which they apply to taxpayers. Those new rates are as follows, with previous rates in parenthesis: 10% (12%); 12% (15%); 22% (25%); 24% (28%); 32% (33%); 35% (35%); 37% (39.6%)

Here’s a chart showing the new tax brackets for single filers:

Rate Taxable Income Bracket

10% $0 to $9,525

12% $9,526 to $38,700

22% $38,701 to $82,500

24% $82,501 to $157,500

32% $157,501 to $200,000

35% $200,001 to $500,000

37% $500,000 and up

Here’s a chart showing the new brackets for married couples who file jointly:

Rate Taxable Income Bracket

10% $0 to $19,050

12% $19,051 to $77,400

22% $77,401 to $165,000

24% $165,001 to $315,000

32% $315,001 to $400,000

35% $400,001 to $600,000

37% $600,001 and up

Other changes that might affect you:

· Estate tax rate stays at 40% but doubles exemption levels.

· New bill keeps current deductions for student loan interest.

· Allows taxpayers to deduct medical expenses exceeding 7.5% (down from 10%) of their Adjusted Gross Income (AGI). This applies retroactively to January 1, 2017.

· Lowers corporate tax rate from 35% to 21%, the biggest drop in American history.

· Income for Pass-through Businesses (i.e. Partnerships, LLCs, S Corps) receives a 20% deduction for the first $315,000 of joint income.

· Eliminates Alternative Minimum Tax for corporations, but keeps it for individuals and raises the exemption to $500K for single taxpayers and $1 million for couples. Alternative Minimum Tax is essentially a secondary tax on the wealthy, put in place to offset the benefits a person with high income could receive but using other deductions.

All of these tax cuts are based upon “trickle-down” (supply side) economic theory, which states that all tax cuts, whether for businesses or workers, spur economic growth. A phenomenon last seen during the Reagan years, trickle-down theory says targeted tax cuts on businesses, high-income earners, capital gains, and dividends will prompt economic growth by “trickling down” to benefit the masses. The theory assumes investors, savers, and company owners are the real drivers of growth. It promises they’ll use any extra cash from tax cuts expand business growth, and investors will buy more companies or stocks.

The revised tax brackets have little influence on the mortgage industry but they do affect consumers and how much extra cash is flowing in their pockets. For hopeful borrowers, all this could translate into more cash in their paychecks, which can help them afford a down payment on a home. For current homeowners, it can help with footing the costs of monthly mortgage payments, or making an extra mortgage payment to shorten the term of their loan.

Overall, the plan lowers tax rates for each income level, meaning Americans’ tax bills will drop next year. How much individuals will save, though, depends on where they live, their family size, how much they earn annually and whether they itemize on their tax returns or choose the standard deduction.