Just days before Christmas, President Trump signed a comprehensive tax reform bill, or H.R. 1, into law. The Republican-led legislation, which generally went into effect on January 1, 2018, cuts more than $1.5 trillion in federal revenue over the next 10 years and is the largest overhaul to the U.S. tax code since 1986.
Highlights of the bill include an increase in standard deductions for individuals and couples, a drop of the corporate tax rate from 35 percent to 21 percent, a reduction on individual tax rates and an expansion of the child tax credit. In addition to these changes, the new tax plan will also impact homeowners by removing some tax breaks associated with homeownership. Below is a summary of changes and what they may mean for you:
Editor’s Note: While this article is intended to be a general overview of the new tax plan and its impacts, it’s important to remember that each individual’s financial situation is different. Please consult with a tax advisor to determine how the new tax code will impact you specifically.
Individual Tax Rates
Previous Law: Seven income brackets of 10, 15, 25, 28, 33, 35 and 39.6%
New Law: Seven income brackets of 10, 12, 22, 24, 32, 35 and 37%; these will revert to the above bracket rates in 2026
Corporate Tax Rates
Previous Law: 35%
New Law: 21% (beginning in 2018)
Child Tax Credit
Previous Law: $1,000 per child with a phaseout at $75,000 for single filers and $110,000 for married filers.
New Law: $2,000 per child, refundable up to $1,400 for individuals with no income tax liability with a phaseout starting at $400,000; this will revert to the previous law in 2026
Previous Law: $6,500 for individuals and $13,000 for couples.
New Law: $12,000 for singles and $24,000 for married couples; this will revert to previous law in 2026
What it means: Lawmakers nearly doubled the standard deduction for singles and couples. Because of this and the new limits on many popular itemized deductions, many taxpayers likely will forego itemizing their taxes and instead take the increased standard deduction. This may simplify the tax filing process for many individuals and families, but it’s worth discussing with a tax professional to determine whether you’re better off taking the standard deduction or itemizing.
State & Local Tax (SALT) Deductions
Previous Law: Individuals could deduct their state and local income and property taxes when filing federal taxes.
New Law: Individuals can deduct up to $10,000 of property, sales or income taxes; this reverts to previous law in 2026
What it means: As home prices have increased, property taxes have followed; therefore, by bundling property taxes in with state and local sales and income taxes, the $10,000 deduction limit could greatly impact property owners who live in states with high state income tax rates and above average property tax rates. For taxpayers whose property and state income taxes combined are greater than the new $10,000 cap, they will no longer be able to deduct the full amount these taxes when filing federal taxes.
Mortgage Interest Deductions
Previous Law: Individuals were generally allowed an itemized deduction for interest on a principal residence and a second residence up to $1,000,000 (married) or $500,000 (single).
New Law: Homeowners are allowed an itemized deduction for interest on their principal residence and second residence mortgages up to a combined $750,000. Pre-December 16, 2017 mortgages are grandfathered, and new purchase money mortgages may be grandfathered if the purchase contract is dated before December 16, 2017. Refinancing of grandfathered mortgages are also grandfathered, but not beyond the original mortgage’s term/amount.*
What it means: In November, we noted that the most dramatic change for homeowners likely would be the reduction of the mortgage interest deduction cap. While lawmakers initially proposed reducing the cap to $500,000, Congress eventually settled on $750,000 as the limit for mortgage interest deductions. This is a much more homebuyer-friendly number and will primarily affect areas where home values are higher. Another noteworthy change pertains to HELOCs, as interest on a HELOC is no longer deductible under the new law.
*Some exceptions apply for “balloon payment” mortgages.
Capital Gains Exemptions
Previous Law: Individuals can exclude gain of up to $500,000 (for joint filers) from the sale of a primary residence, so long as the taxpayer owns and uses the house as their primary residence for two out of the previous five years and exemption can be used only once every two years.
New Law: Unchanged from previous.
What it means: Initially, Congress proposed changes to capital gains exemptions that may have incentivized current homeowners to remain in their current homes longer. However, lawmakers decided to retain the existing capital gains exemptions, which should prove beneficial for a healthy, stable housing market and offer a benefit for homeowners who wish to sell in markets where home values have increased.
Article By Kim Nelson, CEO, BankSouth Mortgage
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