Now that the GOP tax plan has officially passed, big changes are coming to the way that people file their taxes. One of the biggest debates surrounds whether or it’s worth it to itemize your write-offs rather than taking the standard deduction.
Homeowners (and those looking to buy) should take a closer look at which option will have the biggest benefit in 2018.
To get you prepared for this year's tax season, we’ve outlined some of the most common deductions taken by homeowners so you’ll be familiar with them once it’s time to file.
Mortgage interest deduction
When you take out a mortgage, your payment is comprised of two seperate parts. There’s the principle amount (the money that you borrowed to purchase the home) and the interest-- any money that the bank charges in exchange for lending you the money.
Typically, banks frontload your interest payments, meaning the bulk of your initial mortgage payments mostly go towards interest.
As you pay it down, more of your money will go towards that principle amount.
Under the new tax plan, homeowners are allowed to deduct the interest they pay on mortgage debt up to $750,000 (or $375,000 for those filing separately).
Since the majority of mortgage interest is paid within the first few years of buying, that’s when you’ll likely see the biggest benefit from this deduction.
State and local taxes
If you choose to itemize your taxes, you have the ability to write-off your property tax payments, as well as any state and local income taxes.
Under the new plan, you can write-off up to $10,000 of these costs.
For those who have yet to enter the housing market, your best bet is to factor these costs into your home search and to choose an area that allows you to take full advantage of these benefits.
Home improvement loans
Similarly to how the mortgage interest deduction works, the new GOP tax plan allows homeowners to deduct their interest payments on home equity loans up to $100,000.
However, there’s one bit caveat to this one: your home equity loan must be used to build equity. In other words, you’ll be allowed to deduct interest if the loan was used for home renovations like updating a kitchen or bathroom. If you use the loan for other purposes though, you won’t be able to take advantage of this deduction.
Since more people are working remotely these days, the home office deduction is becoming increasingly relevant. To claim it, you need to have a space in your home that’s dedicated solely to work purposes.
The deduction itself can work in one of two ways:
- You can either write-off $5 per square foot of the space that you use (with a maximum of 300 square feet)
- Or you can total up the costs of running your home office and write-off a percentage equal to the percentage of space the office takes up within your home overall.
Theft and loss
It's never fun to think about, but if your home was damaged due to a natural disaster this year in a federally-declared disaster like Hurricane Irma or Hurricane Harvey, you’ll be eligible to write off those costs.
So, should you itemize?
Short answer: it depends.
This is only a short list of tax deductions available that homeowners might want to take advantage of. Most likely, they’ll be combined with a variety of other personal and business deductions, which will reflect your overall expenditure during the year.
Ultimately, only you and your financial advisor can decide which path is best for you to take.
However, for those who recently bought a home or are looking to buy in 2018, it’s never too early to start taking a closer look at the potential financial benefits that may be in store for you thanks to your new property.