The 2018 tax overhaul brought a lot of changes to the tax code as we knew it. And now, even a year later, there is still a lot of misinformation about the new rules and how they work. As we gear up for a new tax year, here are three misconceptions you shouldn't buy into.
1. Mortgage interest is no longer deductible
You may have heard that tax code changes impacted the mortgage interest deduction, and there's some truth to that. It used to be that you could deduct the interest on a mortgage of up $1 million, but beginning in 2018, that threshold was lowered to $750,000. That said, the deduction itself is very much alive and well. And if you took out your mortgage before Dec. 15, 2017, you essentially got grandfathered in under the old rules -- meaning you can still deduct interest on a mortgage of up to the full $1 million.
Of course, whether it pays to take that deduction is another story. The mortgage interest deduction is only available to tax filers who itemize on their returns. Since the standard deduction virtually doubled in 2018 from its previous level, it's expected that fewer filers will itemize as a result. But if you are itemizing and own a home, know that you can still deduct all your mortgage interest, provided your loan doesn't exceed the aforementioned thresholds.
2. Itemizing no longer pays
As just mentioned, the standard deduction has risen so substantially that itemizing will make less sense for a larger number of taxpayers. But that doesn't mean itemize won't ever make sense.
In 2019, the standard deduction will be $12,200 for individual tax filers, and $24,400 for couples filing joint returns. Therefore, if you have deductions that exceed these thresholds, itemizing will continue to make sense.
Now keep in mind that if you're a homeowner in a state with high property taxes and formerly relied on your property tax deduction to lower your tax bill, you may not get as much relief as you'd like. That's because last year's tax overhaul now limits the state and local tax deduction to $10,000, and property taxes are included in that bucket. But there's a host of additional tax deductions that are very much still on the table, like the medical expense deduction as well as deductions for charitable contributions.
Before you write off the idea of itemizing, run the numbers to see what makes sense. You may be surprised to discover that you'll actually save more by itemizing rather than choosing the standard deduction.
3. Refunds will be higher under the new system
One important thing the tax overhaul did was lower virtually every individual tax bracket so that workers' highest dollars of earnings are now taxed at a lower rate than before. As such, you might assume that your tax refund will be higher than ever, since you're liable for less tax on your highest earnings.
But that won't necessarily be the case. While it's true that tax rates went down, the Internal Revenue Service released new tax withholding tables in 2018 to accompany that change, and those guidelines should've dictated how much tax your employer took out of your earnings. As such, you may have seen your paychecks go up from their previous level, which means that the extra money you're expecting in your refund may have, in fact, already been paid to you during the year.
So don't start spending your tax refund in your head before seeing what that sum actually amounts to. On the plus side, a lower refund is actually a good thing -- it means that you lent the U.S. government less of your hard-earned money throughout the year for nothing in return.
The tax code has long been complicated, and last year's overhaul only added to the confusion for many. If you're unclear about how the new rules affect you, talk to an accountant. Though many of the rules are currently set to expire after the 2025 tax year, you don't want to spend the next six years scratching your head wondering whether you're losing money needlessly to the IRS.