By Stephanie Salmon, CPA

Navigating the new tax law may be challenging; numerous deductions that you have come to expect are now in question for 2018. However, the standard deduction has significantly increased by a factor of 2X for many.  Let’s cover the mainstay of itemized deductions that have historically been allowed, the mortgage interest deduction which received a hair-cut under the new tax law.  Mortgage and Home Equity interest deductions for 2017 were limited to $1,100,000 ($1,000,000 for acquisition and $100,000 for home equity) of debt-- whether for acquisition or qualified improvements to your personal residence and/or your 2nd home.  In addition, Home Equity interest was deductible no matter how the funds were used. 

The Tax Cuts and Jobs Act (TCJA) eliminates the deduction for interest on home equity debt and limits the mortgage interest deduction to qualified residence debt of up to $750,000 ($375,000 for married taxpayers filing separately) for homes purchased after December 15, 2017.  However, the IRS has advised that interest paid on home equity loans and lines of credit remain deductible if the funds are used to buy, build, or substantially improve the home that secures the loan.  The $1,000,000 acquisition debt limitation is grandfathered for loans established prior to December 15, 2017, therefore, refinancing a mortgage in excess of $750,000 should be carefully considered.  The most significant take away is the disallowance of the interest deduction on a home equity loans used to pay personal living expenses (including credit card debt) and interest on a home equity loan on a taxpayer's main home to purchase a vacation home.

These rules are designed to chip away at prior tax planning strategies to offset revenue losses by the new lower tax rates.  Tax planning is the key to staying on top of the tax law changes; please contact us now for a planning appointment which will include our analysis of how the tax law changes affect you for 2018 to avoid an unpleasant surprise.