Homeowners: Look to maximize a few 2017 deductions in light of the new tax
At the time of this writing, the House and Senate joint conference committee has just
released it’s final draft of the 2017 tax reform legislation known as the “Tax Cut and
Jobs Act” on December 15th. The bill is now set to move to the congressional floor
for a final vote before the holiday recess. Once both houses of Congress vote to pass
the final tax bill, it will go to the President for approval and signature into law.
This proposed bill reflects the largest overhaul of the U.S. tax code in decades,
impacting all aspects of the nation’s economy and all taxpayers from a resident
individual to multinational corporations.
Here we will touch on a few of the proposed tax law changes impacting individual
taxpayers and homeowners that you will want to learn and discuss with your
tax advisor before year-end.
- Home mortgage and home equity interest expense deduction
- Deduction of state and local (real estate, etc.), taxes
- Moving expense reimbursement and moving expenses
- Miscellaneous itemized deductions
- Overall limitation on itemized deductions
- Standard deduction
Although final approval of the tax bill remains to be seen, there are certain steps
that you can take now to get ready in case the tax reform goes into effect for 2018.
With proper planning and analysis of your projected individual income tax,
Alternative Minimum Tax (AMT) and Net Investment Income Tax (NIIT) situation
for 2017, 2018 and beyond; homeowners will be able to maximize a few 2017
deductions in light of the new tax bill. CAVEAT: Please note that due to the
complexities of the duel tax systems of federal regular income tax and AMT tax, as
well as the integrated federal and state tax regime for Hawaii filers, this process may
be quite complex requiring multi-year tax projections. Unfortunately, there is no
one size fits all or a general rule of thumb.
Home Mortgage and Home Equity Interest Expense Deduction – For taxable
years 2018 through 2025, there will be special rules reducing the amount of
acquisition indebtedness from $1million to only $750k on which home mortgage
interest expense may be deducted. This new lower limitation will apply to
mortgages incurred to purchase a first or second home after December 15, 2017.
In general, acquisition indebtedness is debt that is incurred in acquiring,
constructing, or substantially improving a qualified residence of the taxpayer and
which is secured by the residence. A transition rule and exception is provided for a
home buyer who has entered into a written binding contact before December 15,
2017 on the purchase of a principal residence to close before January 1, 2018 and
who actually purchases such residence before April 1, 2018; here, such a new home
mortgage would be grandfathered under the old limitations as discussed below for
For existing mortgages incurred on or before December 15, 2017, the home
mortgage interest deduction limitation will remain unchanged with the amount of
acquisition indebtedness limited to $1million ($500k married filing separate). A
later refinancing of this existing debt (within its original term) will continue to
qualify for the $1million ($500 married filing separate) grandfathered limitation as
long as such refinancing does not exceed the amount of the existing acquisition
The second provision of the special rules impacting homeowners for taxable years
2018 through 2025 is the disallowance of interest expense deductions on home
equity loans (sometime known as HELOCs).
Deduction of state and local (real estate, etc.), taxes – For taxable years 2018
through 2025, the amount of taxes taken as an itemized deduction will be limited to
$10,000 ($5,000 married filing separate). In addition, an anti-abuse provision is
added to the final draft of the bill to prevent the prepayment of a future year(s)
income taxes in 2017 to otherwise bypass the proposed cap starting in 2018.
Moving expense reimbursement and moving expenses – Except in the case of a
member of the U. S. Armed Forces on active duty who moves pursuant to a military
order, there will be a suspension of the exclusion for qualified moving expense
reimbursement. In addition, there will be a suspension of the deduction for moving
expenses for taxable years 2018 through 2025.
Miscellaneous itemized deductions – There will be a suspension of miscellaneous
itemized deductions for taxable years 2018 through 2025.
Overall Limitation on Itemized Deductions – There will be a suspension of the
overall limitation on itemized deductions (the so called “Pease” limitation) for
taxable years 2018 through 2025.
Standard Deduction – Under current law, an individual who does not elect to
itemize deductions may reduce his or her adjusted gross income (AGI) by the
amount applicable standard deduction in determining taxable income. For 2017,
the amount of the basic standard deduction is $6,350 for single taxpayers and
$12,700 for married filing joint.
The bill almost doubles the basic standard deduction proposing $12,000 for single
taxpayers and $24,000 for married filing joint taxpayers. This would drastically
reduce the number of taxpayers who opt to itemize their deductions, since the only
reason to do so is if your individual itemized deductions combined exceed the
standard deduction amount for your tax filing status.
ACTIONS TO CONSIDER – With these proposed federal income tax changes looming,
taxpayers and homeowners may want to consider the following as the look to
maximize a few 2017 deductions in light of the new tax bill. Again, work closely
with your tax advisor to determine your individual income tax, AMT and NIIT tax
situation for 2017, 2018 and beyond. Taxpayers who are not in or subject to AMT
tax for 2017 should consider the following actions at the same time as balancing
their cash flow needs and the time value of money.
- Whether to pay your fourth quarter 2017 estimated state taxes before the
end of the year rather than paying them when otherwise due in January
- Whether to pay the second half amount of your real estate property taxes for
your home(s) (for the assessment year beginning July 1, 2017) before the
end of the year rather than when due in February 2018.
- Whether to pay the second half amount of your real estate taxes on any land
held for investment or any other miscellaneous investment expenses before
the end of the year – before the proposed suspension of miscellaneous
itemized deductions starting in 2018.
- Whether to pay your January 2018 home equity loan interest payment before
the end of the year.
In addition to trying to maximize the above deductions in 2017 for regular income
tax purposes (that are not deductible for AMT tax purposes), taxpayers should also
consider whether to accelerate any 2018 charitable contributions into the current
year. You would do this if you are itemizing for 2017 and anticipate you will not be
itemizing for 2018 – in light of the higher standard deduction for next year as
proposed in the final tax bill.
In summary, the final tax bill is not limited to the proposed tax changes as discussed
above, but rather incorporates many other provisions applicable to individuals,
business owners and entities, alike, all of which will require tax planning in advance.