There are several things to consider when it comes to either filing your taxes this year, planning for the future, or when contemplating the benefits of purchasing a house the following year.
Americans will have to itemize their tax returns to receive the highest amount of money back under the Tax Cuts and Jobs Act as it affects tax filings for the 2018 calendar year and standard deduction increases. An estimate by the Tax Policy Center shows as many as 27 million fewer taxpayers who are expected to itemize their taxes.
The remaining 19 million taxpayers, on the other hand, will still benefit from itemized deductions not only this year but next year as well. You must find out how purchasing a home or making changes to your home or current mortgage debt will affect your tax return.
1. The Mortgage Interest Deduction
Did you know that you cannot only deduct the interest you pay on your mortgage from your federal income taxes, but you can also deduct the points you earn? This is because points are basically prepared interest. The tax reform somewhat changed the rules for the mortgage interest deduction by putting a cap at mortgage amounts of $750,000. However, if you already have an existing mortgage that’s higher than the cap, you can still deduct the interest. If you acquired the mortgages after 2017, the new limit will apply.
2. State and Local Property Taxes
Property taxes are a local tax deducted as part of the state and local taxes deduction which can be a huge tax break for taxpayers living in an area with high property taxes. It is, however, important to note that the state and local taxes deduction, beginning in 2018, will now be capped at $10,000. The homeowners of States with high property taxes such as California and New York won’t be affected since their property taxes are below the limit. For the coming years, you may find yourself unable to include the full expenses if you’re paying high state income taxes and/or have very high property taxes.
History shows state and local property taxes deductions offers a great financial benefit to owning a home. The mortgage interest and property taxes have a big impact when filing tax returns.
3. Medical Home Improvements Deduction
The cost on big improvements done in your home for medical reasons such as putting in an elevator if climbing stairs starts to become impossible, and small ones such as switching your doorknobs to lever-style knobs because arthritis makes it hard for you to grip things, can be deducted as part of the medical expense deduction.
The deduction for these expenses can only be claimed if they don’t increase the value of your home. For instance, you have a house worth $300,000 and adding an elevator cost you $80,000. The value of your home may have increased to $350,000 but this doesn’t change the fact that you can only deduct $40,000 of the expense. You will only be allowed to deduct the entire amount if the improvement doesn’t change the value of your home. You may also deduct upkeep expenses for the purpose of medical improvements in the coming years. If you hired a maintenance man to check your new elevator once a year, his fees can be deducted in the form of medical expense.
4. Rental Income
Homeowners nowadays are earning a good amount of money from renting out space to tenants or tourists. The benefit to this is mainly the right to deduct the cost of repairs and improvements made to that certain rental space. If you did some repair to the commercial or residential properties you own as an investment, then you may deduct them on your tax return. The tax laws, however, are separate from those homeowners.
All filing status may have benefited from the recent tax reform bill that dramatically increased the standard deductions, but if you can take all three of these deductions, it may be best for you to itemize your deductions. If you maxed out these deductions, your opening the possibility of making other itemized deductions more attractive such as the charitable contribution deduction. Try and put together all other itemized deductions in one place and find out how much your total savings will be versus when you do a standard deduction.
