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Tax Breaks for Homeowners: The Tax Cuts and Jobs Act

Homeowner tax deductions are always top of mind this time of year. But as a homeowner, are you maximizing all of the tax benefits available to you?

Tax deductions, or the allowable subtractions that can lower the total amount of taxes owed, are one of the many benefits to home ownership. And this year, there are pretty significant tax code changes now that the Tax Cuts and Jobs Act is in effect. President Donald Trump signed this bill into law on December 22, 2017, and 2018 marks the first tax year for homeowners to realize its benefits and tax breaks. It is the largest piece of tax reform legislation in more than three decades.

So, how exactly does the Tax Cuts and Jobs Act affect homeowners?

Standard Deduction

Taking the standard deduction is one way to keep your taxes as simple as possible.

In 2017, the standard deduction for single filers was $6,350.00. For married couples filing jointly the standard deduction was $12,700.00. Homeowners filing 2018 tax returns will notice the nearly double standard deduction increase. For single filers, the new standard deduction is $12,000.00 and $24,000.00 for married couples filing jointly.

While you can save time opting to take the standard deduction compared to itemizing individual deductions, in some cases you might lose money. Each has a benefit and a drawback. Itemizing deductions could offer an opportunity to deduct more expenses. It’s always best to consult your tax adviser or a tax professional with your specific questions.

Mortgage Interest Rate Deduction

One of the major benefits of owning a home is deducting your mortgage interest. Effective January 1, 2018, new homeowners can include the interest on their mortgage, but only up to $750,000.00 (or $375,000.00 if you’re married filing separately). In the past, this cap was $1 million (or $500,000.00 if you’re married filing separately). If you took out a mortgage on or before December 15, 2017, you’re in the clear as you’ll be grandfathered in.

State & Local Taxes

Claiming itemized deductions for state and local property taxes is now capped at $10,000.00 (or $5,000.00 if you use the “married filing separate” status) no matter how many homes you own or where these homes are located. In the past, these itemized deductions were unlimited.

Home Equity Line of Credit or Home Equity Loans

If you’re looking to buy, build, or substantially improve your home, you can deduct the interest you pay on a home equity line of credit or home equity loan.

In responding to a number of public inquiries, the IRS offered an example and stated, “Under the new law, interest on a home equity loan used to build an addition to an existing home is typically deductible, while interest on the same loan used to pay personal living expenses, such as credit card debts, is not.”

Capital Gains

If you sell your home for more than you paid for it and prove that you did indeed call it home sweet home, or in legal tax terms your primary legal residence, Uncle Sam is going to let you keep your profits, tax-free.

Before the recent tax reform, when homeowners sold their home they could exclude up to $250,000.00 (or $500,000.00 if married filing jointly) as long as they owned and used the home as a primary residence for at least two out of the five years before the home sale.

Now, the numbers remain the same, but homeowners have to reside in their homes and consider it a primary residence for five out of the past eight years.

Residential Energy Efficiency Savings

The non-business energy property credit offered some exemptions if homeowners made energy efficient upgrades to their homes, but it expired on December 31, 2017. Still, if you did make energy saving improvements to your home in 2018, you may be able to take a credit of 30 percent of your costs of qualified solar electric property, solar water heating property, small wind energy property, geothermal heat pump property, and fuel cell property. Consult with your tax professional to see if you are eligible.

Homeowners may pay more in taxes with the Tax Cuts and Jobs Act, but one thing is obvious: investing in your home to increase its value will pay off later. Smart investments include upgrades or remodels to the bathroom or kitchen. Using your 2018 tax refund to buy a home warranty is also worth considering. A home warranty covers the repair and replacement fees when household appliances wear out, break down, or need to be replaced. Every home warranty differs which is why it’s important to compare home warranty plans before signing a contract.

What portion of your 2018 tax return will you put towards caring for your home? No matter the amount, it’s a worthy investment.