There is so much information swirling out of Washington, D.C., these days, it’s hard for the average person to keep up, let alone determine how they will be affected by various changes to legislation. When it comes to tax reform, however, it’s important to get a handle on how proposed changes will impact your wallet—especially for homeowners.
According to the National Association of REALTORS® (NAR), tax reform proposals may actually mean a tax increase for many middle-income homeowners. According to the study, “Impact of Tax Reform Options on Owner-Occupied Housing,” homeowners with adjusted gross incomes between $50,000 and $200,000 would see their taxes rise by an average of $815. The study also estimates that combined tax savings from claiming the mortgage interest deduction and real estate property tax deductions would drop 82 percent between the 2018 and 2027 period.
The study, which was commissioned by NAR and prepared by PricewaterhouseCoopers (PwC), estimates that this tax increase would result from the interaction of several provisions in the reforms under consideration. For many homeowners that currently benefit from the mortgage interest deduction, the elimination of other itemized deductions and personal exemptions would cause their taxes to rise, even if they elected to take the increased standard deduction. For others, the elimination of the state and local tax deduction alone would result in higher federal income taxes.
In addition to increasing taxes on many middle-income homeowners, the report finds that such a proposal could cause home values to fall by an average of more than 10 percent in the near term. In areas with higher property taxes or state income taxes, the drop could be even greater. Although the study doesn’t directly analyze the “Better Way for Tax Reform” plan or the recent White House outline, it examines a proposal with many similar elements.
Those elements include lowering and consolidating marginal tax rates to only three rates, setting a top income tax rate of 33 percent, doubling the standard deduction, eliminating all itemized deductions (other than charitable contributions and mortgage interest) and personal exemptions, eliminating the alternative minimum tax, and capping the tax rate on pass-through business income at 25 percent.
PwC estimated that roughly 35 million households will claim the mortgage interest deduction in 2018, three quarters of which have incomes between $50,000 and $200,000. According to NAR, roughly 70 percent of those eligible for the mortgage interest deduction claim it in a given tax year.
Once tax reform is finalized and passed into law, be sure to consult with your accountant before filing your taxes to ensure you’re taking the proper deductions.
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Published with permission from RISMedia.