Mortgage Interest and Tax Deductions for Homeowners

Posted April 15 2019
by PenFed Your Money
Mortgage Interest and Tax Deductions for Homeowners - PenFed Your Money - Learn Center

As a homeowner you are probably asking yourself what mortgage interest and tax deductions are available to you and your family. As a homeowner you are afforded advantages when tax season rolls around because your home can provide a wealth of tax deductions. But while many homeowners will see the same tax benefits in 2018 that they have in the past, the new tax law has changed available mortgage tax breaks.

Whether you’re a first-time homebuyer, a renter looking to make a purchase, or a happy homeowner, you’ll want to familiarize yourself with how your mortgage will affect your finances. So, before you take out a mortgage or equity loan, refinance your home, sell your home, or file your taxes, be sure you’re aware of these tax implications.

How Does the Tax Cuts And Jobs Act (TCJA) Affect My Tax Bill?

Starting in 2018, homeowners will see the impact of the TCJA on their federal taxes.  While most of those changes limit or completely remove items you used to deduct, not everyone will see a difference on their returns.  But if you have an expensive home, particularly in an area with higher property taxes, you could find yourself with a bigger tax bill.

These are the changes that are most likely to affect homeowners.

The standard deduction is higher

The standard deduction has nearly doubled, so it may be more appealing to skip itemizing deductions and simply take the standardized deduction instead. While that isn’t necessarily a bad thing (it’s possible it could lower your tax burden), it would mean you couldn’t take any of the deductions related to being a homeowner.

These are the new standard deduction amounts by filing status:

●      Single: $12,000

●      Married, filing jointly: $24,000

●      Married, filing separately: $12,000

●      Head of household: $18,000

Mortgage interest deductions are capped

●      For homes purchased after 12/15/17, you can only deduct mortgage interest on debt up to $750,000 (or $375,000 if you’re married filing separately). If you purchased your home before that date, the earlier rules still apply and you can deduct interest on debt up to $1 million (or $500,000 if you’re married filing separately). However, these new limits don’t affect refinances, as long as the new loan principal isn’t higher than your original loan.

But if you don’t have a large mortgage, this change won’t affect you at all.

Property tax deductions are capped

Previously, you could deduct all of your state and local taxes — including property taxes — from your federal tax return. For filing taxes from 2018, you’re limited to deducting just $10,000 (or $5,000 if married filing separately).

While this change affects many filers, homeowners are most likely to see it in their property tax deductions.

You can’t always deduct moving expenses

You used to be able to deduct expenses for moving if you had to move for a job, but the deduction has been removed except for active-duty military members. Also bear in mind that if you move and are reimbursed for expenses by your employer, that reimbursement will be considered taxable income — again, with exceptions for military members.

You can’t always deduct interest on home equity loans

Home equity loans and home equity lines of credit have long been an excellent way to get cash by tapping into the equity on your home. These loans were especially appealing because you could deduct the interest you paid, which meant you could take a vacation, pay your child’s college tuition, or fund a dream wedding at a very low cost.

But starting with filing 2018 taxes, you can only deduct interest on a home equity loan if it’s used to pay for home improvement. Home equity loans and lines of credit are still good ways to borrow — they typically have lower interest rates than other loans — but they won’t include a tax break unless you’re putting the money back in the home.

You can’t deduct private mortgage insurance

If you didn’t make a down payment of at least 20%, most types of mortgages — excluding VA loans — require you to pay private mortgage insurance (PMI). Costs vary, but you can expect PMI to run from 0.5% to 1% of the original loan amount annually, which can add up.

Previously, you could deduct this expense from your taxes. While this wasn’t specifically cut by the TCJA, the PMI insurance deduction expired at the end of 2017 and was not renewed by the new tax bill. It’s a loss that’s most likely to hit first-time homebuyers, who may find it difficult to save up 20%. If you’re thinking of buying, this is a good reason to save up your 20% first, or get a VA loan which doesn’t require PMI.

Learn more about how the tax law affects different types of mortgages

What About the First-Time Homebuyer Tax Credit?

The first-time homebuyer credit was available in 2008, 2009, and 2010, offering qualified first-time buyers tax credits of up to $8,000. However, this wasn’t just free money: it needs to be repaid over 15 years by filing  Form 5405 .

The credit has now expired, but if you did purchase your first home in 2008, 2009, or 2010 you may still be able to claim it. Requirements vary depending on when exactly you purchased your home, so if you think you qualify, it’s best to contact a tax professional.

How to Claim the Home Mortgage Interest Deduction

You can deduct mortgage interest paid on qualified home for loans up to $1 million (or $500,000 if married filing separately) for loans taken out before 2018, or up to $750,000 (or $375,000 if married filing separately) for loans taken out in 2018 and beyond. You can also deduct interest for a home equity loan or home equity line of credit if you used the money to improve your home. If the combined amount of your mortgage and equity loan exceeds those amounts, you can deduct part, but not all, of your interest payments.

To make these interest deductions, you’ll need to itemize deductions on  Form 1040, Schedule A . Your lender should have sent you a mortgage interest statement (Form 1098 ) with the information on what you paid to help you get the correct amount. If not, contact your lender to find out how much interest you paid.

If you itemize deductions, you’ll be able to take advantage of this and other homeowner tax deductions — like property taxes — but you won’t be able to take the standard deduction. Because the standard deduction has been increased this year, you may want to do the math to see whether taking advantage of the home mortgage interest deduction is better than taking the standard deduction.

What Other Home Deductions Can Be Claimed?

While these deductions aren’t usually as large as those we’ve already mentioned, there are a few more deductions you may be able to claim:

●      Mortgage points. If you paid for points to lower the interest rate on your mortgage, you can deduct the cost from your taxes on the year of your loan or deduct it over the life of your loan.

●      Property taxes. Your property taxes can also be deducted, though you may not be able to deduct all of them anymore. You can currently deduct state and local taxes up to $10,000, so if your property taxes combined with your state taxes are higher than that, you won’t be able to deduct everything.

●      Renewable energy improvements. If you’ve installed solar panels, wind turbines, geothermal heat pumps, or fuel cells to power your home, you may be eligible to deduct up to 30% of the cost (including installation) off your taxes.

●      Home offices. You can deduct the cost of a dedicated home office space as long as you aren’t an employee of a company. This is a change from previous years that makes the deduction applicable only to self-employed individuals and independent contractors.

●      Business expenses for rentals. If your home is a rental property, you can deduct some of the costs involved with renting it out. This can include maintenance costs, management fees, legal fees, taxes, mortgage interest, and more. However, these must be claimed on Form 1040 Schedule E rather than Schedule A, where you report mortgage interest for your residence.                                                           

You should be aware that one popular deduction is gone, however. Starting in the 2018 tax year, you can no longer deduct the cost of private mortgage insurance. However, this could change because Congress is currently considering a bill — H.R.284 — that would extend the deduction. It hasn’t passed yet, but if it does become law, you may be able to claim this deduction retroactively.

What Tax Forms and Documents Will I Need?

In addition to the standard tax paperwork, homeowners will also need:

●      Form 1098 mortgage interest statement for your home, second home, construction loan, home equity loan, or home equity line of credit. This should also include information on any points you purchased.

●      Property Tax receipt. If this is paid by your lender via an escrow account, they may send this along with your 1098.

●      Receipts for renewable energy improvements if you’ve made any

●      Receipts for home improvement projects funded by a home equity loan or line of credit if you’ve made any.

●      Home office details if you’re claiming the home office deduction.

●      Receipts for business expenses and income related to a rental home if you have one.

●      Form 1099-S if you’ve sold your home While you won’t have to usually don’t pay capital gains taxes on the sale of a primary residence , you will have to report the sale.

You’ll want to keep all of this paperwork to prove your deductions are legitimate in case you’re audited. The IRS may audit a return for up to three years afterwards, and up to six years afterwards in case of a large discrepancy (25% or more of gross income). Thus, you should keep all federal tax paperwork for at least six years.

While these documents may not be needed for this tax year, you should also keep these:

●      Deed to the house for as long as you own the property.

●      Home closing documents for three years after you’ve sold the property.

●      Receipts for capital improvements for three years after you’ve sold the property.

●      Mortgage payoff statement should be kept forever, in case your lender decides you still owe money for your home.

What Is a Property Tax Assessment and How Can I Appeal It?

Once a year, your local tax assessor will appraise the value of your home to determine your property taxes. If the appraised value is higher than the previous year, you’ll pay more in property taxes. While you used to be able to deduct property taxes off your federal taxes, now you can only deduct state and local taxes — which includes property taxes — up to $10,000 (or $5,000 for married filing separately).

Though this change may not impact your federal tax return, if your home’s appraised value has gone up by a significant amount, you might consider appealing it. Get started by comparing your home’s assessed value to the sales price of similar homes in your area. To research pricing, you can search online real estate search sites, contact a local real estate agent (though they may not be willing to do it for free), or contact your local tax assessor’s office.

While the details for every area are different — check with your local tax assessor to find out exactly what you need to do — the broad strokes are the same. You’ll file your appeal and the local assessor will either approve it or deny it.

What Tax Items Should Think About When Selling My Home?

When you sell your home, you can take all typical homeowner tax deductions for the period of the year you owned the house, as well as deducting some of the expenses of selling the home. As long as the home is a principal residence and you’ve lived in it for two of the five years preceding the sale, you can deduct or exclude costs such as:

●      Legal fees

●      Escrow fees

●      Advertising costs

●      Real estate commissions

●      Repair costs, such as fixing a leaking roof

●      Home improvement costs, such as adding a deck, as long as they were made within 90 days of closing

Capital gains taxes on sale profit are another concern, but many sellers won’t have to pay these. As long as sellers don’t make a profit of over $250,000 (or $500,000 for a married couple filing jointly) and they’ve lived in the home for two out of the past five years, they should be excluded from capital gains tax.

Consult a tax professional before filing

While we’ve presented the basics, every tax situation is different. Please consult a tax adviser for further information regarding the deductibility of interest and charges