You may have heard that recent changes to the tax code will impact homeowners as early as this year. But one thing you need to realize is that the changes that took effect under the Tax Cuts and Jobs Act don't apply to the previous tax year. This means that as you sit down to file your 2017 return, you'll need to follow the old rules, not the current ones. Here are a few specifics to keep in mind.
1. You can claim a deduction for mortgage interest on loans up to $1 million
The mortgage interest deduction remains one of the most lucrative tax breaks for homeowners, even though it's changed as a result of tax reform. Starting in 2018, borrowers can deduct interest on home loans worth up to $750,000, which is down from the previous limit of $1 million. But if you already had a loan in place prior to 2018, and it didn't exceed $1 million, then you're able to deduct whatever interest you paid last year on your 2017 return.
Incidentally, old mortgages are grandfathered into the old system, so if you signed a mortgage worth $900,000 in 2017, you can still write off your interest in full going forward, even though the threshold has since been lowered to $750,000. Of course, all of this assumes that you itemize on your tax return. If you're claiming the standard deduction, you won't have to worry about figuring out how much interest you paid.
2. You can claim home equity loan interest
Under the new tax changes, home equity loan interest is no longer deductible. But if you paid interest on a home equity loan last year, you're still able to deduct it on your taxes, assuming you itemize. Specifically, you can deduct interest on a home equity loan worth up to $100,000 if you're filing a joint return or $50,000 if you're single or married but filing separately.
That said, don't get too comfortable with this deduction, because unlike mortgage interest, home equity loans aren't grandfathered into the old system. This means that even if you signed your loan well before the tax changes took effect, 2017 is still the last year you can deduct any associated interest.
3. You can deduct your property taxes in full
The new tax laws limit the state and local tax deduction, or SALT deduction, to $10,000 effective this year, and that includes property taxes. But if you paid more than that in real estate taxes last year, don't worry -- you can deduct whatever amount you paid, and that includes any amounts you might have prepaid in anticipation of the SALT deduction cap.
4. You might be eligible for a home office deduction
If you conduct business out of your home, you might snag a sizable amount of savings in the form of a home office deduction. To be eligible, you'll need to meet two criteria. First, you must have a dedicated space in your home used only for business. Second, that space must serve as your primary place of business. This means that if you rent office space and work there four times a week, you don't qualify.
There are a couple of ways you can go about calculating a home office deduction. The simple way is to claim $5 for every square foot of office space you have, up to a maximum of 300 square feet, or $1,500. Otherwise, you can calculate your various home expenses, figure out how much space your office takes up within your home, and claim your deduction proportionally. For example, if your home office takes up 300 square feet of your 3,000-square-foot home, and you spend $20,000 on home expenses, you can deduct 10% of that, or $2,000.
Clearly, it makes sense to see which method of figuring this deduction works best in your favor. In our example, you'd be better off going through the motions of adding up your home expenses and claiming a percentage of them, but if you didn't incur many expenses last year, it may be best to use the $5-per-square foot calculation.
Going forward, homeowners will have fewer options for claiming tax breaks, so as you sit down to prepare last year's tax return, focus on ways you can capitalize on that property. Though figuring your various deductions might take work, it's a worthwhile investment if it results in money back in your pocket.
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