For many, homeownership represents one of the biggest milestones in life. Few are thinking about the tax implications of exciting moments like buying their first home or even remodeling it, but with the historic tax reform that passed in late 2017 and Tax Day right around the corner, it’s important to understand your tax situation and how it will impact your current and future home-buying decisions.
One important thing to remember: For the majority of taxpayers, the new tax reform law does not impact your tax year 2017 taxes (the ones you’re filing now). The majority of the changes will be reflected on your 2018 taxes, which you file in 2019.
Whether you’re just beginning to tour homes or you’ve already signed the deal, here are the major tax reform provisions that potential and new homeowners should be aware of for their 2018 taxes.
[See: 7 Most-Missed Tax Deductions and Credits.]
Mortgage interest deduction cap. For those home shopping in areas with high housing costs, be aware that starting in 2018, you can deduct home mortgage interest secured by your principal residence on acquisition indebtedness — the outstanding amount incurred in acquiring or improving your property — of up to $750,000. If you purchased your home before 2018, you will still be able to deduct home mortgage interest based on $1,000,000 in home acquisition indebtedness. If you find yourself drawn to areas with high housing costs, consider paying a bigger down payment if you can to keep your loan under the new tax reform law’s $750,000 loan threshold, so you can still deduct all of your mortgage interest at tax time.
State and local property tax deduction limits. If you are searching for a home in a high property tax area, keep in mind that the new law limits the amount of state and local property, income and sales taxes that can be deducted to $10,000. In the past, these taxes have generally been fully tax deductible.
[See: 10 Smart Ways to Spend Your Tax Refund.]
Moving expenses. Did you move for a new job in the last year? Take advantage of claiming your unreimbursed moving expenses this year before the new tax reform law eliminates this deduction on your 2018 taxes. You qualify if you started your new job and have worked full time for at least 39 weeks within the first 12 months after your move. Your new place of employment must also be at least 50 miles or farther away from your old home and place of employment.
Beginning on tax year 2018 taxes, which you’ll file in 2019, only members of armed forces on active duty are allowed to take advantage of these tax breaks.
While it may seem like several things will be changing for homeowners this year, there are techniques to increase your tax refund or reduce your tax bill. Here are several tax tips that you should be taking advantage of when filing 2018 taxes.
[See: Answers to 7 Burning Tax Questions.]
Adjusting your withholding. If your new home will increase the size of your mortgage interest deduction or make you an itemizer for the first time, you don’t have to wait until you file your tax return to see the savings. You can start collecting the savings right away by adjusting your federal income tax withholding at work, which will boost your take-home pay.
Penalty-free IRA payouts for first-time buyers. Did you know that at any age, you can withdraw up to $10,000 penalty free from your individual retirement account to help buy or build a first home for yourself, your spouse, your kids, your grandchildren or even your parents? To qualify, the money must be used to buy or build a first home within 120 days of the time it’s withdrawn. Although the 10 percent penalty is waived, you will be taxed on the distribution based on your tax bracket.
Using Roth IRA distributions for your first home purchase. If you use Roth IRA distributions to buy your first home, you may be able to withdraw up to $10,000 from your Roth IRA tax free and penalty free. That’s if you had your Roth IRA for at least five years before taking the distribution.
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How Tax Reform Impacts Homeowners originally appeared on usnews.com
