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Tag: tax reform

Castles in the Sand

2019 tax nightmare

Written by Louise Bolger on . Posted in Business, Castles in the Sand.

The Christmas tree is put away, the leftover food and holiday cookies are hopefully gone, and the gifts have been returned to the mall – so what’s next? The day has arrived, the day that some Americans have been dreading for over a year, the day we have to start thinking about filing 2018 tax returns.

A couple of weeks ago I received an email from my mortgage lender labeled Important Tax Documents Enclosed. I knew what it was and, as with all other important tax documents received this time of the year, it immediately switched me into denial mode. Since the tax returns for 2018 will have significant changes, particularly to homeowners, I thought I would do you the favor of being one of the first to put you in the “I hate tax time” mood.

The Tax Cuts and Jobs Act that passed last year is the first major change to the American tax system in 30 years. The changes will help some individuals more than others but all of us will be affected, particularly homeowners.

There are a couple of major changes for property owners and they all have to do with mortgage interest and state and local taxes. First of all, the mortgage interest deduction can only be taken on mortgage debt of up to $750,000, which is down from $1 million prior to 2018 for mortgages on all properties. However, this only applies to mortgages taken after Dec. 15, 2017. Preexisting mortgages are grandfathered in. In addition, the mortgage interest deduction on primary and second homes, not investment properties, was saved and still can be taken.

However, interest on home equity debt can no longer be deducted at all, whereas previously up to $100,000 in home equity debt could be considered. There is an exemption to this if the home equity loan can be proven to be used substantially for home improvements.

The next really big homeowner issue is what is commonly known as SALT, which stands for state and local taxes. The new tax law puts a cap on this deduction of $10,000, including all owned properties. So, if the combination of state, property tax and sales tax is $15,000 for the year, you can only deduct $10,000. Naturally, this is a very big issue in states that have high state income taxes and even higher property taxes. Fortunately, Florida is not one of those.

Contributions are mostly the same, but medical expense deductions have been reduced from 10 percent of adjusted gross income to 7.5 percent of adjusted gross income. There are a few other things that can no longer be deducted like tax preparation expenses, moving expenses and others.

The standard deduction increase, however, is probably the biggest change to the tax code which involves everyone. The standard deductions for individuals and married couples have just about doubled from previous years to $12,000 for individuals and $24,000 for married couples. For many households, the increase in the standard deduction may not make it worthwhile to itemize your tax return. For example, a married couple pays $8,000 in mortgage interest, makes $4,000 in charitable contributions and pays $5,000 in state and local taxes totaling $17,000 in deductions. With a $24,000 standard deduction, it may not be worthwhile for this couple to itemize. Since everyone’s tax returns are different, a tax professional should always be consulted.

Good mood, bad mood, yours depends on your unique tax situation. But in the long run, it’s only money and there are always more important things, so get out of the denial mode.

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Castles in the Sand

Is the mortgage tax deduction doomed?

Written by Louise Bolger on . Posted in Business, Castles in the Sand.

Have you heard that the Trump administration and Congress are trying to get some level of tax reform accomplished? If you haven’t, you’re either living under a rock or like a lot of Americans, you can’t stand to listen to one more news report. Well, this time you might want to switch from your Netflix escape to real news.

The tax reform plan was finally announced on Nov. 2. There is still a long way for this proposed bill to go before becoming law but there are significant proposals in it that will affect property owners. As predicted, the standard deduction would be doubled, which could make it more advantageous for some homeowners not to itemize their deductions, primarily their mortgage interest, making this popular deduction irrelevant for some homeowners.

Why is this such a big deal? It’s a big deal because depending upon your financial position, the size of your mortgage and a variety of other deductions, it may be beneficial not to itemize your tax return and just take the standard deduction. The argument is that the middle-class homeowner with less valuable property would opt for the standard deduction while the government is still giving a subsidized tax deduction for homeowners with more expensive properties.

In addition, the proposed plan would reduce the mortgage interest cap from $1 million to $500,000 and also cap property tax deductions at $10,000. Neither of these changes will be good for high-end property owners in states where property taxes are high. And as of this writing, the eligibility of mortgage deductions for second homes is vague, as is the one-time capital gains deduction.

According to an analysis by Zillow, about 30 percent of U.S. homes are valuable enough to make it worthwhile to take the mortgage interest deduction and the state and local property taxes. Under the proposed changes, that would drop to 5 percent. This would make the proposed standard deduction a better option for most taxpayers.

Naturally, the real estate industry, led by the National Association of Realtors (NAR), is incensed saying the tax plan “would all but nullify the incentive to purchase a home for most, amounting to a de facto tax increase.” The NAR had PricewaterhouseCoopers conduct a study with the outcome that home prices nationally would likely drop 10 percent in the short term, but most economists expect prices to recover over time.

This would certainly be an adjustment for most Americans who have come to depend on their mortgage and tax deductions. But considering the median home value in the U.S. is just over $200,000, many taxpayers could do better with an increased standard deduction. Home ownership is higher in some countries with no mortgage interest deduction. Canada has a 69 percent home ownership rate and the United Kingdom a 71 percent home ownership rate and neither country has a mortgage interest deduction. The home ownership rate in the U.S. is 64 percent.

Could the proposed caps on mortgage interest and property taxes create a negative incentive to purchase a home on Anna Maria Island and our surrounding waterfront areas? Maybe for some buyers, but people still want what we have and have always shown their willingness to pay the price. In fact, my opinion is that it may have a short-term effect on young people and seniors, who are trying to decide if owning a home or renting is beneficial to their tax bracket. Overall people don’t buy houses because they get a tax deduction they purchase houses to create a home and live a particular lifestyle.

Chances are the legislation will end up looking a lot different in the end than what is currently proposed, and as with all changes made by the government, some will benefit us and some will not.