Read This Before You Take Out That Home Equity Loan!

America has a long history of tariff’s and taxes, but this is also what led us to become an independent nation.  This is a country of great prosperity and opportunity, one in which you can start a business, own a home and create the life you want to live.

The government of the United States of America realized that the tariffs collected would not be enough to cover the war efforts and began implementing various Revenue Acts beginning in the 1860’s, but each time the tax was repealed.  Then in 1895, citizens got a reprieve when “Pollock v. Farmers’ Loan and Trust Company, (1895), U.S. Supreme Court case in which the court voided portions of the Wilson-Gorman Tariff Act of 1894 that imposed a direct tax on the incomes of American citizens and corporations, thus declaring the federal income tax unconstitutional (Encyclopedia Britannica).  A federal income tax was not enacted again until 1913, when the 16th Amendment was ratified to include a permanent income tax.

For over 100 years, certain types of interest has been deductible on taxes, to include home mortgage interest.  When the interest deduction was first included in 1913, it was primarily intended for businesses and farmers, because they were the only ones that took out loans.  Homes were typically paid for in cash.  However, through the years the tax laws have evolved into what we currently have today.

The mortgage interest deduction is a motivating factor to purchase a house and reduce your tax liability at the same time.  In 2017, you can use the interest paid on a mortgage up to $1 million, and any interest paid on a home equity loan up to $100,000.

Joe and Karen have a $300,000 mortgage and they paid $11,600 in mortgage interest.  They also took out a home equity loan for $80,000 and paid $3,000 in interest.  When they file their 2017 taxes, they can take a $14,600 deduction, reducing their taxable income.  Just the interest alone is more than the standard deduction of $12,700, so the more personal exemptions and itemized deductions they have, the less money they owe in taxes.  Some of those other itemized deductions could be casualty and theft losses, moving expenses, tax preparation expenses, and any unreimbursed employee expenses.

The Tax Cuts and Job Act that was signed into law on December 22, 2017 goes into effect for the 2018 calendar year.  Home owners will no longer be able to take the interest deduction on a home equity loan and mortgage interest will only be deductible up to $750,000 of the loan.

If Joe and Karen have the same information for 2018, they will only be able to take the $11,600 in mortgage interest, they will NOT be able to use the $3,000 from the home equity loan.  In addition, the standard deduction will increase to $24,000, which is good for them because the personal exemptions have been eliminated as well as the deductions for the casualty and theft losses, moving expenses, tax preparation, and unreimbursed employee expenses that were mentioned above.

There are a lot of changes with the new laws.  Contact Excerebus CPA Firm, or 407-988-5647, and let us help you determine how these modifications will affect you.

Categories: Tax Information

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