2018 Home Mortgage Interest Deduction

President Donald Trump signed into law the Tax Cuts and Jobs Act (TCJA) on December 22, 2017.  With its passage many important changes and revisions were made.  Once such item that has undergone some important changes is the,”home mortgage interest deduction”.   The IRS has long incentivized home ownership by offering taxpayers a tax deduction for mortgage interest.  This long-standing tax perk has fueled one of the cornerstones of the “American Dream”, home ownership!

Under the Tax Reform Act of 1986, home mortgage interest was allowed only up to $1,000,000 of debt principal that was used to acquire, build, or substantially improve a principal residence or a second home; and the debt was secured by that residence respectively.  However, under the TCJA, the limits on itemized mortgage interest deduction have been reduced to $750,000.  Notably, existing home owners are grandfathered in under the older $1,000,000 limit.  Furthermore, there is one important tidbit to consider, and that is the ever confusing IRS terminology, in this particular case – “acquisition indebtedness”.   Taxpayers are responsible for determining how much of their mortgage interest is or isn’t deductible based on this IRS jargon if you will, of acquisition indebtedness.  And of course, to add anxiety and confusion to the taxpayer the IRS expects the taxpayer to keep extensive records on how the mortgage proceeds were actually used, irregardless of how the loan is structured or what the lender calls it.

Further complicating the matter, the passing of the TCJA has completely eliminated the ability to deduct interest on home equity indebtedness, hence taxpayers need to inform themselves as to what exactly the IRS determines are these types of loans by their standard.  This is effective for 2018 and beyond there are no grandfathering provisions for existing home equity debt.

Don’t be to eager to deduct the mortgage interest (if any) on your second home, especially if you rent out the second home.  To qualify for this deduction there are a variety of rules and many times it is best to consult a tax professional like TaxPM who can determine how much(if any) of the mortgage interest can be deducted for a second home, and if it in fact falls into the “home mortgage interest deduction” or otherwise needs to be treated differently per the tax code.  Also be aware that the rules and difficulty to ascertain the deduction change substantially if you rent the second home for more than 14 days.

In closing, one would hope that it would be as simple as receiving a mortgage interest statement and reporting that number directly on the tax return – well it’s not that simple. Although there are many potential tax breaks with owning a home, like, home mortgage interest deduction, taxpayers need to pay close attention to the rules and changes that were adopted by the new tax code with the passing of the Tax Cuts and Jobs Act (TCJA).

2018 Income Tax Brackets and Standard Deduction Rates

The Tax Cuts and Jobs Act (TCJA) was signed into law by President Donald Trump on December 22, 2017.  With its passage many tax payers were given some much needed tax relief.  Notable changes include:

•  Elimination of personal exemptions

•  Elimination of the “Pease” limitation on itemized deductions

•  Expansion of the Child Tax Credit

•  Standard deduction for single filers increased by $5,500 and by $11,000 for married couples filing jointly (see Table 2 below)

•  Tax table changes (see Table 1 below)

To protect individuals that are pushed into higher income tax brackets due to reduced value from credits and deductions instead of increase in real income (known as “bracket creep”), the act also requires that the IRS adjust numerous tax provisions for inflation.

 

Table 1. 2018 Income Tax Brackets and Rates

 

Table 2. 2018 Personal Exemption and Standard Deduction

The personal exemption for 2018 is eliminated

 

Child Tax Credit

The Child Tax Credit under TCJA is worth up to $2,000 per qualifying child.  The age cut-off stays at 17 (child must be under 17 at the end of the year for taxpayers to claim the credit).  The refundable portion of the credit is limited to $1,400.  This amount will be adjusted for inflation after 2018.

 

 

Spring of each year is a dreaded time for most Americans as tax returns are due, and unlike last year when the due date landed on a Sunday allowing an extra couple days for taxpayers to mail in their returns, the date to file personal returns is Monday April 15th, 2019.  It may sound off into the distant future but rest assured it will be here before you know it.  So we recommend reviewing what information you currently have and getting organized now to get ahead of any potential issues.  Of course, many of you will not be able to prepare your return this early as you are awaiting year-end statements and other tax related documents (e.g. 1099’s and W2’s).  Notwithstanding, it’s advisable to start preparing for the 2019 Tax Season now.  Here are some tips to help you get organized and ready for next years tax season:

1. Create a Checklist

The best way to get started is with a Checklist, and the best way to create your list is by using your most recent filed tax return to help jog your memory of the various forms and schedules you will need to prepare for.   As the corresponding tax related documents and statements arrive for each form you can check them off your list.

 

2. Collect tax related documents

Well-organized records make it easier to prepare a tax return and help provide answers if your return is selected for examination or if you receive an IRS notice. The IRS requires you to keep records, such as receipts, canceled checks, and other documents that support an item of income, a deduction, or a credit appearing on a return as long as they may become material in the administration of any provision of the Internal Revenue Code, which generally will be until the period of limitations expires for that return.

The IRS also recommends the following:

Property Records

Keep records relating to property until the period of limitations expires for the year in which you dispose of the property in a taxable disposition. You must keep these records to figure your basis for computing gain or loss when you sell or otherwise dispose of the property.

Healthcare Insurance

You should keep records of your own and your family members’ health care insurance coverage, including records of employer-provided coverage or premiums paid and type of coverage for private coverage, so you can show that you and your family members had and maintained required minimum essential coverage. If you’re claiming the premium tax credit, you’ll need information about any advance credit payments you received through the Health Insurance Marketplace, the premiums you paid, and the type of coverage you obtained at the Marketplace. If you or any of your family members are exempt from minimum essential coverage, you should retain certificates of exemption you may receive from the Marketplace or any other documentation to support an exemption claimed on your tax return.

Business Income and Expenses

If you’re in business, there’s no particular method of bookkeeping you must use. However, you must use a method that clearly and accurately reflects your gross income and expenses. The records should substantiate both your income and expenses. If you have employees, you must keep all your employment tax records for at least 4 years after the tax becomes due or is paid, whichever is later.

3. Find a Tax Preparer

It doesn’t really matter whether you are an individual or a business owner, you will need tax planning and preparation strategy that includes tax saving tactics and strategies like insurance strategies, employee benefit plans, financing alternatives and more. All these things can be overwhelming for an ordinary person, but the experts in this field like TaxPM are doing this on a daily basis for dozens of individuals and businesses.