What the new tax bill means for you


An older man balancing a checkbook with a calculator at a dinner table

When Congress passed the Tax Cuts and Jobs Act (TCJA) in December, it made significant changes that affect virtually all taxpayers. Here’s how the new Federal tax code impacts deductions for individuals and small businesses.

Deduction capped for state and local income and property tax

Under the old tax code, if you itemized deductions, you could deduct state and local income and property taxes from your federal income tax return. Under the new code, the deduction for these taxes combined is capped at $10,000.

The cap takes effect for 2018 and remains in place until 2026. It has also prompted a move in Lansing to restore and gradually increase Michigan’s personal exemption. Otherwise residents’ state income taxes would rise. Lawmakers expect that the state exemption will be $4,000 for 2018 when new legislation is passed.

Mortgage interest deduction on first mortgages preserved – mostly

Homeowners with mortgages taken out before December 15, 2017, can still deduct mortgage interest for loans up to $1 million. For those with mortgages purchased after December 15, 2017, the deduction cap is lowered to $750,000.

This means if you have a $1.5 million mortgage that originated in 2015, you can deduct interest on up to $1 million. Since the loan was taken out before December 15, 2017, it qualifies for the higher cap.

If you borrowed $800,000 on January 15, 2018, the TCJA limits your mortgage deduction to interest on up to $750,000.

Home equity loan deduction on hiatus until 2025

Unfortunately, the TCJA eliminates the deduction for interest paid on home equity and HELOC (home equity line of credit) loans for 2018 through 2025.

Interest deductions for home improvements still available – if you refinance and the changes are “substantial”

First things first – you need to know the definition of “acquisition indebtedness.”

According to the IRS, acquisition indebtedness is debt incurred in acquiring, constructing or substantially improving a qualified residence of the taxpayer and which secures the residence. The term also includes indebtedness from refinancing, subject to some constraints.

For example, you could incur $400,000 of acquisition indebtedness by purchasing a new principal residence. If you pay the debt down to $150,000, your acquisition indebtedness becomes $150,000.

The only way to increase your acquisition indebtedness would be by refinancing the $150,000 and adding on the cost of a substantial improvement. This could be $20,000 for a new kitchen. The new mortgage loan would be $170,000 and all the interest would be deductible because the additional indebtedness was incurred to substantially improve your home.

What about mortgage interest deductions on second or vacation homes?

Interest for second homes or vacation homes is still deductible, however, it is capped on new acquisition debt.

Again, we need to look at an IRS definition. Home acquisition debt is a mortgage taken out after October 13, 1987, to buy, build or substantially improve your main or second home. It must also be secured by that home. Only the debt that is not more than the cost of the home plus improvements qualifies. (The additional debt may qualify as home equity debt.)

The new deduction of $750,000 is a combined limit. This means interest payments on up to $750,000 of new acquisition debt are deductible and is applicable to a principal dwelling and one other residence such as a vacation or second home.

Interest deductions on rental properties remain

If a homeowner owns their primary residence and a rental/income property, the interest would be deductible on the primary residence and the income property.

If a homeowner owns multiple income properties, under the TCJA and the previous tax code, interest on additional properties would not be deductible.

Interest can still be deducted on small business loans
Businesses with an average annual gross revenue less than $25 million may still deduct interest paid or accrued on their small business loan.

Get tax advice

The TCJA applies to 2018 taxes, and we recommend that your talk to a qualified tax advisor when making tax decisions.

The tax code might be complex, but your banking doesn’t have to be! Consumers makes mortgages and business banking easy. Call us at 800.991.2221 to get your questions answered.


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