When it comes to owning a house, there are some benefits homeowners may see when they do their annual taxes. Along with other expenses related to your home that may be deducted, homeowners can deduct the cost of their property taxes and mortgage interest from their federal taxable income.
Mortgage interest is the amount of money homeowners pay in interest on their mortgage. Since interest rates vary depending on the terms of each individual mortgage, this number is different for every homeowner, and many rates will change throughout the life of the loan. When it’s time to prepare annual taxes, the amount of money that was paid in interest on a mortgage can be deducted from total income.
Property taxes are determined by the county in which you live. These taxes can include different taxes such as school, and city government taxes, combined into one payment. The county sets the property tax percent and the amount a homeowner pays depends on the value of their home. For example, if the property tax is 3%, a house worth $100,000 will pay $3,000 per year, while a house valued at $300,000 will pay $9,000. The taxes paid can vary if a home increases in value, or vice versa.
When you do your taxes, the money you paid for mortgage insurance and property taxes can be deducted from your total taxable income. If your taxable income is $50,000, and you paid $5,000 in insurance and taxes, you new taxable income is $45,000. The more deductions you have, the lower the taxable income is, and the more money you may potentially receive in a tax refund. Your accountant will know what can and cannot be deducted, so the best course of action is to keep track of all interest, taxes, and monies spent on your home.
With Congress passing their new tax overhaul bill in late 2017, many Americans are wondering how it will affect them individually. The overhaul stretches far and wide and will likely impact every single American in one way or another. Let’s take a look at a few key points of the bill and how they will affect homeowners.
Changes in Property Tax Deductions
With the new plan, U.S. taxpayers and homeowners won’t be able to completely deduct local and state property taxes in addition to income or sales tax. The new plan allows individuals a $10,000 deduction to go towards state and local income along with property taxes or sales taxes.
This means that homeowners that live in a high-tax state might see an increase in their tax bill because they lost the deductions they had been able to take advantage of before.
You Won’t Need to Itemize as Many Things
The new Tax Cuts bill nearly doubles the standard deduction you can take from $6,350 to $12,000, which virtually eliminates the need to itemize mortgage interest and property tax bills if they fall below the $12,000 threshold.
Also, if you file jointly, the standard deduction increases to $24,000, meaning that most housing expenses won’t even come close to the threshold providing more tax savings for the future.
A Possible Benefit for Home Buyers
Many predict that home prices might temporarily drop in parts of the country once the new tax plan goes into effect. They believe demand may decrease because of the new stipulations added to the sale of primary residences. Before the plan, homeowners could deduct up to $500,000 for couples for the gross income made from a home sale.
The new plan stipulates that you must live in the home as your primary residence for five of the last eight years. Experts think this would reduce demand momentarily resulting in a small drop in home prices so if you’re in the market to buy a new home, this could be your opportunity to save some money.
Here’s a useful tool for determining how the tax cuts affect your tax bracket.