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What Impact Did the TCJA Have on Homeowners?


The TCJA famously hurt homeowners, but don't forget to remind your clients: It's temporary. Here's what they should keep in mind.

Jun 4th 2020
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I devoted a previous column to why it’s important for homeowners to keep meticulous records that track their dwelling’s cost basis. I’m using this column to explain recently-introduced rules that adversely affect homeowners.

At the close of 2017, Congress okayed and President Trump signed the Tax Cuts and Jobs Act (TCJA). Like most overhauls of the tax code, the TCJA helps some and hurts others. While the legislation reduces tax rates, it also introduces new rules that, among other things, hurt homeowners who use Form 1040’s Schedule A to claim itemized deductions for mortgage interest, property taxes and casualty and theft losses.

According to our lawmakers, the new rules aren’t permanent. They’re only for 2018 through 2025; come 2026, the old ones for 2017 and earlier years return. Let’s wait and see. Meanwhile, let’s look at three key provisions:

1. TCJA shrinks deductions for payments of mortgage interest. The old rules allowed owners to claim deductions for their payments of 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 owners with existing mortgages. They remain entitled to write off payments of interest on mortgages of up to $1 million. Grandfathering also is available for owners who opt to refinance their remaining mortgage debts.

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.

Both the old and the new rules impose limits. 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 cars or furniture, 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 deduct 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, meaning no annual increases to reflect inflation.

An added consideration: Because TCJA sharply increases the standard deduction amounts that are available to filers who opt not to use Schedule A, many owners will find it’s no longer worthwhile for them to itemize. Hence, they are going to derive zero tax benefit from either their mortgage interest or the state and local taxes they pay.

What if an owner finds it still pays for her to itemize? The true tax benefit of her various itemized deductions may be modest, because her total itemized deductions may be barely larger than her standard deduction.

3. TCJA deep-sixes deductions for casualty and theft losses. The old rules for 2017 and previous years already imposed severe limits on deductions for losses claimed by individuals whose homes, household goods and other property suffer damage due to events like burglaries, civil disturbances fires, hurricanes, landslides and storms.

The big barrier: Losses after reductions for insurance reimbursements generally were deductible only to the extent that the total amount in any one year surpassed 10 percent of an owner’s adjusted gross income. What kinds of losses qualify? Those, says the IRS, caused by identifiable events that are “sudden, unexpected or unusual.”

TCJA’s new rules further tighten those restrictions. For post-2017 years, they generally allow owners to claim casualty losses only when they suffer losses that are attributable to natural disasters like earthquakes and floods and those losses occur in disaster areas declared by the president to be eligible for federal assistance.

Additional articles. A reminder for accountants who would welcome advice on how to alert clients to tactics that trim taxes for this year and even give a head start for next year: Delve into the archive of my articles (more than 350 and counting). 

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