We all know that taxes and real estate influence each other, whether that’s property taxes, home-ownership related deductions, or any of the many factors that contribute to your financial big picture. With the addition of The Tax Cuts and Jobs Act and the WA State response to the McClearly Decision, current and prospective homeowners have many changes to consider. Most changes from the bill went into effect on January 1, 2018, and therefore do not affect your 2017 taxes. However, we believe it is best to be prepared for the coming year. This is doubly true for first-time home buyers weighing the tax incentives of buying, current homeowners assessing their current situation, and seniors looking towards their retirement.
With that said, here are 11 things you need to know this going into the new tax year:
1. Ch-ch-ch-changes: Mortgage, Home Equity, and Moving
While there are a lot of changes coming with the new bill, here are a couple things directly related to home-ownership that the National Association of Realtors (NAR) has highlighted in their comprehensive overview.
- Mortgage Interest Deduction – The limit on deductible mortgage debt is reduced to $750,000 for new loans. What about second homes? The interest deductible remains on second homes, but is subject to the same limit of $750,000. Current loans of up to $1 million are grandfathered in and are not subject to the cap.
- Home Equity Loans – The bill repeals the deduction for interest paid on home equity debt through the end of 2025. However, interest is still deductible on home equity loans if the proceeds are used to substantially improve the residence. Forbes contributor Nick Clements says “Even without the deduction, home equity will likely remain one of the cheapest ways to borrow money.”
- Moving Expenses – All moving expense deductions have been repealed, except for members of the Armed Forces.
2. Reductions & Deductions
The mortgage interest deduction isn’t the only thing changing though, here are some other factors to take into consideration.
- Tax Rate Reductions – Generally¸ individual tax filers will see lower tax rates. Not every tax payer will pay lower rates, though many will.
- Deduction for State and Local Taxes – The bill allows an itemized deduction up to $10,000 for the total of state and local property taxes and income or sales taxes. This $10,000 limit applies for both single and married filers. Note: The bill specifically precludes the deduction for 2018 state and local income taxes prepaid in 2017.
- Standard Deduction – The new standard deduction for single individuals is $12,000. For joint returns, the standard is $24,000.
- Repeal of Personal Exemptions – Under the prior law, tax filers could deduct $4,150 in 2018 for the filer, spouse, and for each dependent. These exemptions have been repealed.
- Child Credit – The child tax credit has been increased to $2,000 (from $1,000). The income phase-out to claim a child was raised to $500,000 ($55,000 single/$110,000 married) for all filers.
3. Staying the Same
Here are a couple of items that are remaining the same regarding taxes, though you may still want to look closer while you are planning for the year. Since they are remaining the same, we won’t be going into further detail here.
- Mortgage Credit Certificates (MCCs)
- Deduction for Medical Expenses
- Student Loan Interest Deduction
4. What this means for First-Time Home Buyers
NAR gave a great example, that can be summed up as follows: tax incentives remain for first-time buyers, but they are less than previous incentives. Give the example a read for full details.
5. What this means for Middle-Income Families
As the previous number, read into the NAR example. Here’s the quick summary: For a middle-income family of five, renting may have larger tax cuts than owning a home.
6. Local Property Taxes Are Going Up!
You may have already heard this in the news: property taxes are going up. Last year, responding to the McClearly decision (links to PDF of court file), the WA State Legislature created a new state levy to fully fund our schools. Naturally, creating a new levy for the entire state requires a new balance be put in place between state and local property taxes. Unfortunately due to the timing, that balancing act won’t level out until 2019. Here’s the average increase to expect in each county for 2018:
- Pierce County (The News Tribune): The average homeowner will see an increase of 11.5%. Carbonado will see the highest increase at 24.5%. Among larger cities, Sumner’s average is the highest at 21.8%. Generally, larger cities will see smaller increases: 11.9 percent in Tacoma, 6.5 percent in Lakewood, 7.6 percent in Puyallup.
- King County (The Seattle Times): The average homeowner will see an increase of 17 percent. As with Pierce, a small town will see the largest spike – Carnation at 31%. Normandy Park meanwhile, will be getting the smallest increase at 9 percent. Seattle itself sits right at the average with 16.9%. Bellevue is a bit higher at 21.6%.
- Kitsap County and Snohomish County (The Seattle Times): The average homeowner in Kitsap will see a 12% increases, while those in Snohomish will see a 16% increase.
The good news: Tax-relief may be on the way. The News Tribune reports that a new projection showing a potential $1.3 billion more in taxes than expected through 2021 has state lawmakers from both parties looking for ways to alleviate the new property tax burden sooner rather than later.
7. The Future of the Local Senior Property Tax Exemption
With all those large property tax increases, many are worried about seniors on fixed incomes. AARP is urging state lawmakers to improve senior property tax exemptions to keep seniors from being taxed out of their homes.
Here is the current information about the senior property tax exemptions for our local counties:
8. That’s great, but what’s this going to do to my home value in 2018?
According to Keeping Current Matters, “the new tax code will have an impact on home values across the country. However, the effect will be much less significant than what some originally thought.” Here’s a look at two nationwide maps provided by Keeping Current Matters.
The first uses data provided by CoreLogic’s Home Price Insights They predict an increase in 49 states, with an average increase of 4.2%.
The second uses data provided by NAR’s analysis of the impact of the tax code. The major difference is that only 42 states will see an increase in price, with the average increases hitting only at 1.9%. Check out WA State though! It’s projected to get even better!
9. What about itemized deductions?
With the higher standard deduction, many people that would have itemized deductions will instead be taking the standard deduction.
- AARP reports “about 30 percent of tax filers now itemize… But that number could plummet to about 10 percent next year because of the new tax law.”
- In number 2, we shared that most, though not all, single filers will see an overall decrease in their taxes. For those with more complex taxes, those most likely to have been itemizing, could see their taxes rise.
- “If you’re that person who used to itemize, these are all big changes,’’ says Alison Flores, principal tax research analyst at the H&R Block Tax Institute. “So now’s a good time for everyone to take a look at what’s different, what deductions they’ve taken and how the new tax law changes affect what they’re doing now.”
10. Assess Your Retirement Situation
If you haven’t already, now’s the time to review your current retirement situation. Will you be affected by these changes in a way that will make you reevaluate your plans?
- If you have a 401k or a Roth IRA, USA Today suggests you consider increasing your contribution as it may help you in the long run. CNBC adds that the way you rollover these accounts has changed.
- Now is a great time to speak to your financial adviser to make sure you are prepared for all incoming changes. If you don’t already have an adviser, please take advantage of HomeKeepr to see our list of recommended services in the area.
11. Tax Day is Coming, Are You Ready?
Your 2017 taxes are due April 17, 2018!
If you need to speak with a tax professional, we would love to recommend one for you. HomeKeepr has all of the information for our trusted service providers. If you have any questions or concerns about any of our recommended professionals, please do not hesitate to call Mary Kay at 206-841-8760 or email MaryKayHorton@KW.com.
So, what’s the bottom line?
Well, it’s varied. Each filer will have to weigh all their options thoroughly to ensure the best return. As a Real Estate Service, we want to make sure you are well-informed and up to date about any financial considerations that may affect your decision to buy or a sell a house.
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