2019 tax nightmare

Castles in the Sand

The Christmas tree is put away, the leftover food and holiday cookies are hopefully gone, and the gifts have been returned to the mall – so what’s next? The day has arrived, the day that some Americans have been dreading for over a year, the day we have to start thinking about filing 2018 tax returns.

A couple of weeks ago I received an email from my mortgage lender labeled Important Tax Documents Enclosed. I knew what it was and, as with all other important tax documents received this time of the year, it immediately switched me into denial mode. Since the tax returns for 2018 will have significant changes, particularly to homeowners, I thought I would do you the favor of being one of the first to put you in the “I hate tax time” mood.

The Tax Cuts and Jobs Act that passed last year is the first major change to the American tax system in 30 years. The changes will help some individuals more than others but all of us will be affected, particularly homeowners.

There are a couple of major changes for property owners and they all have to do with mortgage interest and state and local taxes. First of all, the mortgage interest deduction can only be taken on mortgage debt of up to $750,000, which is down from $1 million prior to 2018 for mortgages on all properties. However, this only applies to mortgages taken after Dec. 15, 2017. Preexisting mortgages are grandfathered in. In addition, the mortgage interest deduction on primary and second homes, not investment properties, was saved and still can be taken.

However, interest on home equity debt can no longer be deducted at all, whereas previously up to $100,000 in home equity debt could be considered. There is an exemption to this if the home equity loan can be proven to be used substantially for home improvements.

The next really big homeowner issue is what is commonly known as SALT, which stands for state and local taxes. The new tax law puts a cap on this deduction of $10,000, including all owned properties. So, if the combination of state, property tax and sales tax is $15,000 for the year, you can only deduct $10,000. Naturally, this is a very big issue in states that have high state income taxes and even higher property taxes. Fortunately, Florida is not one of those.

Contributions are mostly the same, but medical expense deductions have been reduced from 10 percent of adjusted gross income to 7.5 percent of adjusted gross income. There are a few other things that can no longer be deducted like tax preparation expenses, moving expenses and others.

The standard deduction increase, however, is probably the biggest change to the tax code which involves everyone. The standard deductions for individuals and married couples have just about doubled from previous years to $12,000 for individuals and $24,000 for married couples. For many households, the increase in the standard deduction may not make it worthwhile to itemize your tax return. For example, a married couple pays $8,000 in mortgage interest, makes $4,000 in charitable contributions and pays $5,000 in state and local taxes totaling $17,000 in deductions. With a $24,000 standard deduction, it may not be worthwhile for this couple to itemize. Since everyone’s tax returns are different, a tax professional should always be consulted.

Good mood, bad mood, yours depends on your unique tax situation. But in the long run, it’s only money and there are always more important things, so get out of the denial mode.

More Castles in the Sand:

Is a piece better than the whole pie?

2019 real estate trends

Red tide, hurricanes and interest rates