Understanding the 2018 Tax Changes

As you’ve probably heard, there are some significant tax changes taking place in 2018. Understanding these changes can be overwhelming, so I wanted to share some key highlights.

One of the new tax laws places a $10,000 cap on the amount of state and local income taxes and property taxes filers can deduct. While this doesn’t impact everyone, it can cause a strain for many people in high-taxed real estate markets. This strain may have a long-term impact on the greater real estate market and impact home values for everyone. Although it’s too soon to understand the full impact, it’s something to keep in mind if you are in the market for a new home.

Another change impacts the amount of the mortgage interest deduction you can claim on your taxes. The new law reduces the amount of home acquisition indebtedness for which you can deduct interest expense as an itemized deduction from $1 million to $750,000 (for homes purchased after December 15, 2017). This is another change that will mostly impact buyers of high-cost homes, however, the long-term impact could affect the real estate market as a whole. As the cost of a home rises over time, the interest deduction could be limited, thus making it more difficult for buyers.

There’s also concern that these changes could increase inflation, which would cause the Federal Reserve to increase interest rates. This means that mortgage interest rates could increase throughout the year. Mortgage rates have been hovering around 4% for the past year. These will likely increase in 2018, which could put home ownership out of reach for some future home buyers. If you are thinking about buying a home this year, you may want to get pre-approved now and lock in the rate if possible.

Interest rate increases could be especially challenging for Millennials as they become first-time home buyers. The good news is that there have been no changes to the government first-time home buyer programs that are offered.

There is some other good news for Millennials who have student loan debt. The student loan interest deductions are not changing. The IRS allows students to deduct up to $2,500 in student loan interest each year. Although there was discussion about changing this deduction, the final version of the tax bill allowed it to remain.

There are still many unknowns about the long-term impact of this year’s tax changes. I strongly encourage everyone to consult with their tax professionals if you have questions regarding how you may be impacted.

John Holt
President & CEO