The recent Tax Cuts and Jobs Act has caused consternation for taxpayers, tax preparers and even syndicated columnists.
In a recent column, we addressed the issue of the deductibility of interest in an equity line of credit or second mortgage. At the time we wrote the column, it was unclear whether taxpayers would be able to deduct the interest on these sorts of loans.
After our column had been sent to our syndicator, the IRS came out with guidance for taxpayers indicating that homeowners can deduct interest on HELOCs and equity mortgages, with a few caveats.
Overall, there is a new limit on the deductibility of home loan interest. According to IRS.gov, you may deduct the interest owed on loans of up to $750,000 for married couples. That means that you can deduct interest on loans that in the aggregate do not exceed $750,000 if you are married or $375,000 if you are single.
If your home loan and equity loan together exceed those limits, a portion of the interest will not be deductible. In addition, the loans must be used to purchase a home or to repair or improve the property.
HELOCs and second mortgages will no longer be deductible if the loan proceeds are used to pay for personal items, including college tuition, vacations, credit card debt, student loan debt, a vehicle or clothing; the interest paid on that amount will not be deductible.
Finally, the HELOC, mortgage or second loan must be on a qualified residence. That usually means that the residence must be your primary residence or a second home. There’s more information on the IRS website.
In a separate column, we gave an example of how the new tax law limits the amount you can deduct from your income taxes. This is commonly referred to as “state and local taxes,” or SALT.
The new tax rule states that you can deduct up to $10,000 in real estate property taxes and state income taxes. This means if your property taxes and state income taxes together exceed $10,000, you can only take a deduction of up to $10,000 on your federal tax return. Previously, you were able to deduct any amount of state tax and real estate tax you paid.
These are deductions, not tax credits. A tax credit would reduce the amount of your taxes paid by the amount of the credit on a dollar-for-dollar basis. A deduction reduces the amount of your taxable income. So if you have a $5,000 or $10,000 deduction, and your taxable income is $100,000, the IRS will tax you on $90,000 of income.
Of course, nothing is simple when it comes to federal income taxes, and there are other variables that come into play. So please consult your tax preparer for details.
As an aside, the IRS released a new calculator to help employees understand whether their employers have correctly recalibrated their paychecks in light of the Tax Cuts and Jobs Act.
Thanks to two of our eagle-eyed readers who requested that we clarify these two issues.
Ilyce Glink is the author of “100 Questions Every First-Time Home Buyer Should Ask” (4th Edition). She is also the CEO of Best Money Moves, an app that employers provide to employees to measure and dial down financial stress. Samuel J. Tamkin is a Chicago-based real estate attorney. Contact them through her website, ThinkGlink.com.