If you’re planning to buy your first home in Chicago or the Northwest suburbs this year, you might be concerned about Tax Reform and its effects on home ownership. The rules for claiming certain deductions have changed starting in tax year 2018. However, you might still be able to itemize your income tax return next year, if your expenses and tax situation make it worthwhile!
First, please be sure to discuss your tax situation and your future plans with a professional tax preparer. We’re giving you basic information for examples, but we cannot give you tax advice! Good tax planning is an essential part of your financial health.
Here are the Tax Reform highlights that most concern first-time home buyers!
Income tax rates have been reduced starting in 2018. You might see less Federal income tax withheld from your paycheck as early as February 2018. This could help you save more money towards your down payment, or pay down some debts.
The standard deduction has been increased starting in 2018. Please keep in mind that itemizing your income tax return only makes sense when your itemized deductions exceed the standard deduction that is automatically given to all taxpayers. With a higher standard deduction, it may not be financially advantageous to itemize your tax return next year. A lot depends on your personal tax situation, and your specific costs of home ownership.
The mortgage interest deduction is still available in 2018. If you itemize your tax return, you can deduct up to $750,000 in mortgage interest on your primary residence. The mortgage interest on a vacation home is still tax-deductible, too!
Here’s the thing: your mortgage interest deduction is worth more during the early years of home ownership. This is because of the way mortgages pay down, or amortize. During the first several years, most of your mortgage payment goes towards interest, and very little to principal. Eventually, more of your payment starts going towards the principal, and less to interest.
At some point, there’s no tax benefit to itemizing your mortgage interest, because your standard deduction may be worth more than the interest deduction. To see what we mean, experiment with this mortgage amortization calculator from Bankrate. Click on “show amortization schedule” in the calculation box.
You can still deduct property taxes and state income taxes if you itemize, but there is a $10,000 limit on the combined deductions starting in 2018. This isn’t a show-stopper for most first-time buyers, but those purchasing homes in more expensive areas should keep it in mind.
Tax Reform also changed many other deductions, which could affect your total income tax picture and whether or not you choose to itemize. Again, see your professional tax preparer for complete IRS rules and guidance!
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Need personal assistance? Make an appointment to meet us at our Chicago Resource Center for information without any sales pressure. Always feel welcome to contact us for help with your Chicago home buying questions!
Ryan Gable Broker/CEO Starting Point Realty
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