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The new Tax Cuts and Jobs Act took effect on January 1, 2018 and includes a few important changes to the tax code that may affect both new and existing homeowners.
The new tax law caps the amount of deductible mortgage interest at a maximum mortgage amount of $750,000. Any interest paid on mortgage debt exceeding this cap is no longer deductible. The mortgage limit under the previous tax law was $1,000,000. The lower cap only applies to new mortgages and does not affect homeowners with existing mortgages.
The new tax law institutes a limit of $10,000 on the total amount of state and local taxes deductible each year. Local and state taxes include property taxes, as well as sales tax or state income tax. Note: Texas does not have a state income tax, but Texas taxpayers may owe state income tax if they own a rental home or receive other income in a state with a state income tax.
The National Association of REALTORS® provides a helpful recap of how the new tax law affects new and existing homeowners.
While an early version of the tax bill proposed eliminating the Mortgage Credit Certificate program, the final version left the program intact. A Mortgage Credit Certificate, or MCC, provides first-time buyers with a dollar for dollar tax credit of up to $2,000 on the interest they pay on their mortgage every year. Click here to learn more about TSAHC’s MCC program.
A particularly valuable aspect of an MCC is that home buyers do not have to itemize their deductions to receive the tax credit. Why does this matter? Taxpayers must choose between taking the standard deduction and itemizing their deductions, and only homeowners that itemize their deductions can deduct their mortgage interest and state/local taxes.
Furthermore, the new tax law raised the standard deduction to $12,000 for individuals and $24,000 for joint returns. A higher standard deduction means that fewer homeowners will choose to itemize their deductions.
With an MCC, however, the homeowner still has the option to take the standard deduction or itemize (depending on which is more beneficial for them). But they can then apply their MCC tax credit to their remaining tax liability. This article from The Mortgage Reports explains how an MCC benefits homeowners who do not itemize their deductions.
If you are thinking of buying a home, we recommend contacting one of TSAHC’s participating lenders to discuss the tax benefits of an MCC. We also recommend contacting a tax professional to discuss your tax liability and specific financial situation.
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