OWNING A HOME IS getting more expensive, thanks to the Tax Cuts and Jobs Act (TCJA) enacted in December 2017. The new law is the most comprehensive overhaul of the Internal Revenue Code since the Tax Reform Act of 1986. The legislation includes provisions that curtail long-cherished write-offs for mortgage interest and property taxes.
It also abolishes deductions for casualty and theft losses claimed by individuals whose homes, household goods and other property suffer damage due to events like burglaries, fires, landslides and storms. The new rules apply to returns filed for calendar years 2018 through 2025. After 2025, the new rules are scheduled to go off the books. Here’s a look at three key provisions:
1. TCJA shrinks the mortgage-interest tax deduction. The old rules allowed homeowners to claim itemized deductions for interest on as much as $1 million of mortgage debt for a main home and a second home used as a vacation retreat. The cap of $1 million applies to married couples filing jointly and single persons. It drops to $500,000 for married persons filing separate returns.
TCJA grandfathers the old rules for homeowners with existing mortgages. They remain entitled to write off interest on mortgages of up to $1 million. Homeowners also are grandfathered should they opt to refinance their remaining mortgage debt.
The revised rules for post-2017 years decrease the allowable deduction for new buyers from $1 million to $750,000 for married couples filing jointly and single persons, and to $375,000 for married persons filing separate returns. As with the old rules, buyers get just one bite at the apple: The new limits apply to the combined total of loans used to buy, build or substantially improve a person’s main home and second home. Interest on home-equity borrowing for other purposes, such as buying a car, is no longer deductible.
2. TCJA caps write-offs for state and local taxes. The old rules for 2017 and earlier years allowed individuals to take itemized deductions for all of their state and local taxes, including state income taxes, city income taxes and property taxes.
The new rules for post-2017 years impose caps on those deductions. The ceilings are $10,000 for couples filing jointly and single persons, and $5,000 for married persons filing separate returns. These thresholds aren’t indexed for inflation.
An added consideration: Because TCJA sharply increased the standard deduction, many families will find it’s no longer worth itemizing—and hence they’re getting no tax benefit from either their mortgage interest or the state and local taxes they pay. What if you find it’s still worth itemizing? The true tax benefit of your various itemized deductions may be modest, because your total itemized deduction may be barely larger than your standard deduction.
3. TCJA deep-sixes deductions for casualty and theft losses. For 2017 and previous years, there were already severe limits on deductions for such losses.
The big barrier: Losses generally were deductible only to the extent that the total amount in any one year surpassed 10% of a taxpayer’s adjusted gross income. The IRS defines qualifying losses as those caused by identifiable events that are “sudden, unexpected or unusual.”
Under the new law, those tight restrictions got even tighter. For post-2017 years, casualty losses are generally allowable only for losses attributable to natural disasters like hurricanes and floods—plus those losses must occur in disaster areas declared by the president to be eligible for federal assistance.
Julian Block writes and practices law in Larchmont, New York, and was formerly with the IRS as a special agent (criminal investigator). His previous articles include No Touching, Doctor’s Orders and In Your Debt. Information about his books is available at JulianBlockTaxExpert.com. Follow Julian on Twitter @BlockJulian.