How will the Tax Cuts and Jobs Act affect your home mortgage?

With the recent passage of the tax reform legislation known as the Tax Cuts and Jobs Act, many Americans are curious as to how they might be affected. While the new tax code has major implications for many people with a home mortgage, others may notice no difference whatsoever.

Considering that the final House version of the tax law clocked in at 1,097 pages, knowing exactly how the Tax Cuts and Jobs Act affects you individually is best appreciated by a tax or mortgage professional. They can explain to you in fuller detail the extent of its influence. Since the new tax bill went into effect, many of our customers with a home mortgage in Redding, CA have asked us how they will be affected. There’s no single answer to this question, which depends on your income, where you live, and other factors. Yet there are few key points of the act which can assist you in understanding the potential changes you might experience and help you begin possible adjustments.

How the new tax law affects home mortgages: There are two scenarios you need to know

Already, you may have noticed that your paycheck is a little bigger. However, some potential drawbacks of the tax law may not be noticeable for homeowners until your file your 2018 taxes next year. In general, there are two primary scenarios in which the new tax law will affect you, and both have to do with your home mortgage.

  1. If you live in a high tax state like California or New York, you won’t be able to deduct as much from your next tax return
  2. As of December 15, 2017, if you purchase a house worth more than $750,000, you won’t be able to deduct as much

Attention Homeowners: Say Goodbye To Your State and Local Sales Tax Deductions

If you live in a low tax state like Kansas, Texas, or Florida, then you don’t need to worry about this change. Of course, if you have a home mortgage in Redding, CA, then you need to pay attention.

Since California is a famously high tax state, let’s use it as an example. Previously, Californians could deduct the considerable costs of their state and local taxes, including sales tax and real property tax, from their annual taxable income. These deductions could be claimed with no limit. You can still deduct these costs after the Tax Cuts and Jobs Act, yet they will be subject to a $10,000 yearly limit for joint filings. If you are paying taxes on a home mortgage in Redding, CA, then you can no longer write off these taxes when filing your federal return.

In short, Californians and New Yorkers will see a major increase on their tax returns for the foreseeable future.

This deduction cap will affect homeowners who live in areas with higher tax liabilities, and those who usually rely on the limitless deduction may feel the burden of this new restriction. While some places have a lower property tax rate, the area might have higher home appreciations.

Understanding the New Mortgage Interest Deduction

The mortgage interest deduction is the primary change homeowners need to know about. Previously, homeowners with a mortgage of $500,000 or above could deduct their interest payments from their annual taxable income as long as the deductions didn’t exceed $1 million per year for joint filings. With the implementation of the Tax Cuts and Jobs Act, any mortgage loan taken out after December 14, 2017 will be subject to a deduction limit of $750,000 from the homeowner’s annual taxable income, a $250,000 reduction from the previous $1 million cap. Loans taken out before December 15, 2017 are not subject to the reduction, though, and the deduction limit will remain at the $1 million cap.

If your home is worth less than $750,000, or if you purchased your home before December 14, 2017, you don’t need to worry about this change to the tax code.

The Tax Cuts and Jobs Act involves many other alterations to previously established tax regulations and imposes some new ones as well. To understand the extent that you may be affected, you should consult with your tax professional.

Looking to borrow or refinance? Call us today, we can give you the best home mortgage Redding CA has to offer.