If you’re thinking about buying a house, your main concerns are most likely the size of the down payment and monthly mortgage payment and the headache of packing up and moving. There are, however, other concerns that are just as important, especially the tax-related ones. The revised tax laws that took effect in 2018 left plenty of deductions to make buying a house attractive, but there are now some new limits and exclusions. So read on to understand how buying a house in 2019 will affect your taxes.
Deductions for Buying a House
First of all, buying a house in 2019 will affect your taxes by affording you some fairly significant tax breaks, for example:
When you begin making mortgage payments after buying a house, most of each mortgage payment, in the beginning, will go toward interest, not the principal. But you can deduct those monthly mortgage interest payments at tax time.
Here, according to the tax pros, is what you’ll need to do: “To claim a mortgage interest deduction, you’ll have to itemize your deductions instead of taking the standard deduction. If the total amount of mortgage interest you’ve paid is more than your standard deduction, you’ll likely benefit from itemizing your deductions on Schedule A. Your lender will send you a Form 1098 at the end of the year with the amount of mortgage interest you paid during the year.”
You can also deduct property taxes when filing, which can be a pretty good tax break for some people. Just be aware that often in buying a house payment of the property tax is included in the monthly mortgage payment. So you will need to keep track of how much you pay over the course of the year for your property tax.
Buying a house can be a very smart move for many people who work from home, especially those who are self-employed as a freelancer or in some other capacity. US Census data revealed that in 2017 5.2% of all American workers worked from home – that’s about eight million people. If you are one of them, don’t forget the home office deduction.
Again, here’s what the tax pros say: “If you work out of your new home on a regular basis, you may qualify to use the home office tax deduction. Under this provision, you can write off a portion of several home maintenance costs, as long as they are used for your workspace. The key is using the same space regularly and exclusively for your business. (To discover more about the home-office deduction, contact your local agent at (609) 436-5221.)
Tax Changes Related to Buying a House
Buying a house in 2019 may also affect your taxes in ways you aren’t aware of owing to the new changes in tax laws. These include:
CHANGES IN DOUBLE STANDARD DEDUCTION
Formerly, the standard deduction amounts were “$6,500 for individuals, $9,550 for heads of households (HOH), and $13,000 for married filing jointly (MFJ). Now, the standard deduction amounts are $12,000 for individuals, $18,000 for HOH, and $24,000 for MFJ.” Now, this certainly seems like good news, but it can in fact work against you when buying a house.
Consider this scenario. You bought more house than you originally planned on, thinking you’d make up the difference in the extra tax breaks, say, greater deductions for the increased mortgage interest and higher property taxes. In reality, though, you may not be gaining anything in tax breaks because of the higher standard deductions, which serve as a kind of equalizer.
LIMITS ON TAX DEDUCTIONS
In addition, there are some new caps on how much you can deduct for local and state taxes, including property tax. You can still deduct these taxes, but the cap has been lowered to $10,000 for all local and state taxes combined.
This change won’t affect all homeowners, but it can be a financial blow to some. Those who will be most affected are people buying a house in states with high property taxes (Texas and California, for example) or in states with high state income taxes (such as New Jersey and New York).
NO MORE PMI DEDUCTION
Typically, people buying a house with a low down payment are required by their lender to pay for private mortgage insurance (PMI) as a way for the lender to protect their investment. Formerly and with 2017’s renewal, homeowners could deduct the cost of PMI, but this deduction was not renewed in 2018. This means then that if you can’t come up with a 20% down payment, buying a house is more expensive now because you won’t be able to deduct your PMI costs.
Consult Your Local Agent
These then are the primary ways of buying a house in 2019 will affect your taxes. The tax breaks have been reduced in some areas, but buying a house is still a good investment owing to the tax breaks that remain. But you still have to purchase a home wisely in order to maximize the tax breaks.