The United States tax code has generally been pretty generous with homeowners, but things changed a little bit with the Tax Cuts and Jobs Act. Now some homeowners may face higher federal tax bills for 2018 than in previous years -- and in some cases, that bill will be significantly higher.
Why are homeowners at risk of getting hit with bigger bills? Here are a few key reasons.
The SALT deduction has been capped
One of the biggest reasons many homeowners will owe more in federal taxes for 2018 is because the Tax Cuts and Jobs Act imposed new limits on the deductibility of state and local taxes.
Traditionally, taxpayers have been allowed to deduct all income taxes paid to their state and local governments from their federal taxable income -- so if you paid $20,000 to your state in combined taxes, you'd reduce your federal taxable income by $20,000. This makes sense, because you don't want to be taxed by the federal government on money you had to send to your state.
But the Tax Cuts and Jobs Act capped the SALT deduction at a maximum of $10,000, and this cap applies to all taxes paid to your local government -- including property taxes. Many people have property taxes that exceed $10,000 on their own, especially in states with valuable real estate and high property taxes, such as New Jersey and New York.
If you were previously deducting more than $10,000 in property tax and other state and local taxes, you can expect your bill to be way higher because you're losing a big deduction. If you were paying $20,000 in property tax and other state taxes and you lost $10,000 of that deduction thanks to the cap, you'd potentially owe anywhere from $2,200 extra to $3,700 depending upon whether you were in the 22% tax bracket or a higher bracket.
The mortgage interest deduction has been capped too
Homeowners were previously able to deduct mortgage interest on loans up to $1 million. However, the Tax Cuts and Jobs Act capped the mortgage interest deduction at a lower level too. For homes purchased after Dec. 15, 2017, homeowners are now limited to deducting interest on mortgages only up to $750,000.
If you had your mortgage prior to the Dec. 15 deadline, you don't need to worry about this rule change because you're grandfathered in under the old rules.
But if you bought your home late last year or you purchased an expensive home in 2018, your tax bill will be bigger than it otherwise would be thanks to losing part of your mortgage interest deduction.
There are new limits on claiming losses
Prior to tax reform, homeowners also had the ability to deduct unreimbursed losses caused by theft or disasters. Now homeowners can take a deduction for losses only if they experienced them in a federally declared disaster area, and the losses must have been directly caused by the declared disaster.
This means homeowners who've experienced losses from other causes in 2018 will now lose the chance to get a federal tax break to help defray expenses associated with their tragedy.
Homeowners need to know the rules
If you're facing new limits on your mortgage interest deduction and are stuck not deducting some of your property taxes, this doesn't mean your tax bill will always be bigger. Tax reform also changed the tax brackets and doubled the standard deduction, which will affect what you pay.
But if the situations above apply to you, then you are losing some valuable tax breaks, so just make sure you're prepared to pay the additional taxes you may owe the IRS when the bill comes due.