Homeowners have gotten used to lucrative tax perks. Not only can they write-off their mortgage interest, they can also deduct the amount that they pay in local real estate taxes. The two tax breaks represent a big chunk of the deductions claimed by many taxpayers, but the amount that can be deducted will change dramatically if Donald Trump's tax plan passes Congress.
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Here's what could be different the next time you file your taxes.
Shrinking mortgage-interest deduction
Today, homeowners can reduce the amount of their taxable income by the amount of interest that they pay on a first and second home. The deduction can only be taken if you itemize deductions rather than claim the standard tax deduction, and it only applies to interest charged on the first $1 million of debt used to acquire, or build, a home.
Following the implementation of Trump's tax plan, the deduction will only apply to the first $500,000 of debt on a first home.
It's unclear how this change might impact home values, but it could have some unintended consequences for homes at, or near, the new debt limit. This could be particularly true in communities where home values are relatively higher compared to the national average, such as in the Northeast and California.
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In a statement about the tax reform bill, the National Association of Home Builders wrote: "This tax blueprint will harm home values, act as a tax on existing homeowners and force many younger, aspiring home buyers out of the market."
If home values do take a hit, then it wouldn't be good news for homeowners or the companies (and their workers) that build homes. The possibility of that happening is largely responsible for a widespread sell-off in housing-related stocks on Thursday when the plan was unveiled.
Cutting the real estate tax deduction
Homeowners who itemize deductions on their federal income taxes also make good use of provisions allowing them to deduct their local property taxes from their income. Under Donald Trump's tax plan, the amount of property taxes that homeowners will be allowed to take as a deduction is capped at $10,000.
Property taxes represent the lion's share of deductions for most people with low to lower-middle-class income. However, the $10,000 cap might not pose as big of a risk to tax bills as it seems. That's because the Trump plan also doubles the standard deduction for married couples to $24,000.
A doubling of the standard deduction could result in far fewer people itemizing their deductions, which, in turn, would make the cap less of a worry. Everyone's situation, however, is a bit different, and many people in high property-tax communities could end up paying more in income taxes because of this change.
Things to consider
Cutting these valuable homeowner tax breaks won't be popular, but they could be necessary. The Trump tax plan aims to simplify the tax code by reducing the number of tax brackets. It also improves corporate income statements by reducing the corporate tax rate to 20% from 35% today.
Additionally, while it keeps the highest income tax tier at 39.6%, it phases out the estate tax levied on estates valued at $5.49 million. Those changes will reduce federal tax revenue, so they need some way to be paid for, in order to avoid busting the federal budget.
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