If you’re a first time home buyer and hoping to get some major tax breaks to help you pay your mortgage, we have everything that you need to know. Unfortunately, the tax code has changed since 2018 and keeps changing, so if you’re planning on buying a home, you need to talk to your tax professional ahead of time to help you factor in that smaller deduction.
THE BAD NEWS:
There have been three big changes to the tax codes that reduce the tax deductions for homeowners:
- An Increase In Standard Deduction
The Tax Cuts and Jobs Act passed in 2017 eliminated or limited many deductions and credits. So while you used to be able to itemize parts of the cost of your house as a deduction many of our clients are taking the standard deduction.
Example – Married, filing jointly in 2022 your standard deduction is $25,900. If you and your spouse’s state payroll withholdings exceed $10k then you get zero federal deduction for your property taxes paid and if your qualified mortgage interest does not exceed $15,900, the difference between ($25,900 – 10,000) you won’t be itemizing. This means zero tax savings on your home ownership expenses.
- The SALT Cap For Property Taxes
State and Local Taxes, or for short SALT, is an attempt to address wide gaps in the levels of taxation from state to state. Prior to the 2018 tax year, taxpayers could deduct an unlimited amount of state and local taxes on their federal returns. From 2018 on, the SALT deduction is capped at $10,000 for single taxpayers, $10,000 for married couples filing jointly and $5,000 for married taxpayers filing separately. For many, this means that you can no longer deduct your local property taxes that you pay for your home off on your federal tax return, a potentially big hit for people in states with high income and property taxes.
- The mortgage interest limitation
You used to be able to deduct the interest on your mortgage up to $1 million. This still applies to a mortgage you originated before December 16, 2017, but anything after that has a $750,000 limit, or $375,000 if married and filing separately. That $250,000 difference can really add up in states like New York or California where entry level home prices are extremely high.
It’s also important to note that you can only take the mortgage interest deduction if you file Schedule A and itemize, the change does not matter to people who take the standard deduction, which is most people.
THE GOOD NEWS:
There are still ways your tax professional can help you maximize the deductions that still exist, including taking advantage of the Biden First Time Buyer Act.
As of present, this is still a bill and not yet a law, but if it passes, which it looks like it will, first-time home buyers can get a tax credit of 10% of their home’s purchase price – up to $15,000.
As of now, the requirements are as follows:
• Make no more than 160% of your area’s average median income (AMI).
• You must be a first-time homebuyer OR have not owned a home in the last three years.
• You must occupy the property as your primary residence for a minimum of four years.
Remember, this is still a bill, so until it becomes law that credit can’t be considered on your taxes. Meet with your tax professional to see if you qualify and to be notified if this bill becomes law.
For further questions, contact us today!
