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How does the new tax law affect homeowners, joint filers and families?

The new tax law brings numerous changes to the special deductions and credits available to homeowners, joint filers, and families. Here’s what may have the biggest impact on your tax bill.

Tax changes for homeowners

As part of doubling the standard deduction, the new tax law eliminates or reduces several itemized deductions related to homeownership. Depending on your current deductions, these changes may raise or lower your taxes.

Cap on property tax deductions

Homeowners can now deduct only the first $10,000 of their combined state and local property and income taxes on their federal tax return. There was previously no limit.

Mortgage interest limit

The mortgage size cap for the mortgage interest deduction is now $750,000 (down from $1,000,000) for mortgages taken out after December 15, 2017. If your mortgage is above that amount, you would be eligible to receive a reduction on the first $750,000. As you pay down the mortgage, you would continue to receive a prorated deduction even if the mortgage amount falls below the cap.

Example: On a $1 million mortgage, you initially receive a mortgage interest deduction on the first $750,000 of the mortgage. As you pay down the mortgage, you deduct 75% of the interest ($750,000/$1,000,000). If you’ve paid the mortgage down to $500,000, the deduction is based on a $375,000 mortgage amount (75% of $500,000) rather than the full $500,000.

Mortgage interest deduction on primary residence only

The mortgage interest deduction is now only available for your primary residence. You can no longer take it on a vacation home.

This change only applies to personal-use property. Business or investment properties may still qualify for deductions against business or rental income.

Elimination of home-equity interest deduction

Interest on home-equity loans is no longer deductible. The new law limits interest deductions to the purchase of a primary residence with no deduction for interest on loans for home improvement or other purposes.

This provision does not have a grandfathering clause. Even existing home-equity loans are no longer deductible.


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Elimination of the marriage penalty for joint filers

Under the previous tax system, the tax brackets were aligned so that dual-income couples often paid a higher tax rate than if they were single or filed separately. The new tax law shifts the bracket cutoffs so that couples making $400,000 or less per year pay the same tax rate as if they were single.

Tax changes for families

Changes for families fall into two key categories — education and exemptions.

Education deductions and credits

After much debate, education was left relatively untouched. Student loan interest deductions, exemptions for graduate student stipends and education credits were untouched.

The most significant change is that 529 plans can now be used for up to $10,000 in K-12 education expenses per year. This includes private schools but not homeschooling.

Replacing personal exemptions with higher child tax credits

The $4,050 per dependent personal exemption was replaced with an increased child tax credit. The new child tax credit is $2,000 per child with up to $1,400 of the credit being refundable.

Because credits directly reduce taxes while exemptions reduce the income you’re taxed on, families with young children will generally come out ahead. However, because the child tax credit is only available for children under age 17, parents with college-aged students that they can no longer claim an exemption for may see an increase in their tax bills.

Talk to your tax professional

Although the new tax law has taken effect, the IRS will not release its final rules, worksheets and guidance until well into 2018. To properly plan and minimize your 2018 tax bill, including understanding how the final rules affect the interpretation of the law, it’s important to talk to a tax attorney or accountant before you make any moves that could affect your taxes.

This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.

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