The passage of the Tax Cuts and Jobs Act (TCJA) in 2018 impacted some of the advantages homeowners historically received at tax time. The following addresses some of the TCJA’s most important changes taxpayers have seen these last few years that you should be aware of when considering buying a new home, plus a potential tax credit proposed by President Elect, Joe Biden.
Limits on Deductions for State and Local Taxes, Including Real Property Taxes
Previously, individuals could claim an itemized deduction for an unlimited amount of personal (non-business) state and local income and property taxes on their Schedule A of Form 1040. Individuals also had the option of deducting personal state and local general sales taxes on Schedule A instead of state and local income taxes, if that option was more beneficial.
The TCJA, effective 2018-2025, limits the itemized deductions for personal state and local income taxes and property taxes to a combined total of $10,000 ($5,000 if you use married filing separate status). Additionally, personal foreign real property taxes can no longer be deducted at all.
Itemized Versus Standard Deduction
Claiming state and local property taxes can only be done if you have enough itemized deductions to exceed your standard deduction. The TCJA almost doubled the standard deductions compared to pre-TCJA amounts, so fewer individuals will likely be using itemized deductions. The 2020 standard deduction for married joint-filing couples is $24,800. The 2020 standard deduction for heads of households is $18,650. The 2020 standard deduction for singles and those who use married filing separate status is $12,400. All of these amounts are practically double what they were pre-TCJA!
The TCJA also eliminated the potential to deduct more than $10,000 (or $5,000 if you use married filing separately) for real property taxes unless you own a home that is used partially for business or partially rented out. In these situations, you could deduct property taxes allowable to those business or rental uses on top of the $10,000 limit.
TCJA Tax Saver
The TCJA saved a valuable break allowing individuals to potentially exclude from federal income tax up to $250,000 of gain from a qualified home sale or $500,000 if you are a married joint-filler.
2020 Presidential Election Impact on Home Ownership
President Elect, Joe Biden, has proposed a first-time homebuyer tax credit of $15,000. Details are sparse; however, the idea is to help new homebuyers with their down payment. Stay tuned for more details in this area.
Consult an Expert
There are many tax implications for individuals considering home ownership – impacted by each individual’s unique situation. These are just a few tax items that may impact new homeowners. To make sure you minimize your tax liabilities, you visit with your tax preparer or contact one of GreenStone’s tax accountants before buying a new home!