Being a homeowner in the United States is part of that elusive American Dream. Many of us are striving to own property, not just for the status and comfort but also for the benefits. After all, rents are increasing and so are home values. That’s why owning a house seems like a good deal. The tax cuts a homeowner gets are yet another incentive in this area, but that may have changed for recent tax seasons.
After the Tax Cuts and Jobs Act, many of the tax deductions for American household may not be in place anymore. Even if they are, their requirements have probably become more stringent. This Act was a major overhaul regarding the US tax code, perhaps the biggest one in several decades. As a result, several tax deductions were eliminated or at least modified. A few were left as they are, but the changes are still significant. This tax season, it’s worth taking a look at the tax breaks that may still be available for homeowners in the year 2019. We’ll also take a look at the tax landscape in order to understand it better:
Different Types of Deductions
When it comes to tax deductions, things can get somewhat confusing for Americans. Certain tax deductions are available only if a homeowner wants to itemize the deductions, while others might be available even with a standard deduction. Keeping this in mind, here’s what Americans should know about tax deductions in 2019.
Defining Tax Deductions
A tax deduction refers to any item which may reduce the part of your income that has been taxed. For instance, a $2000 student loan interest might be tax-deductible, so you’ll only be taxed on the income remaining after your monthly payment.
A standard tax deduction is available for every household in America, no matter what their yearly expenses are like. You can claim itemized deductions if that will give you more benefits. Any above-the-line deductions, or income adjustments, can benefit a household even if they use itemized deductions or not. There are still certain items that might be labeled as tax deductions but don’t really fall into any of the above categories.
The Tax Cuts and Jobs Act has almost doubled an American homeowner’s standard deduction. Before this increase, 70% of American households used standard deductions. Now, about 95% have used it in 2018 and are expected to do the same in 2019.
For married couples acting as joint filers, the standard deduction has increased from $24,000 to $24,400 in just a year. There are similar increments for singles and heads of households. In a nutshell, itemized deductions may no longer be the best way to go for most households, so you’ll probably do better with the standard option.
Itemizing deductions takes some time and effort, as it means deducting every single deductible expense you’ve incurred this year. In order to make the effort worthwhile, the itemized deduction has to be more than the standard variety. Most taxpayers don’t find itemized deduction tempting, especially not with the doubling of standard deductions in 2018. The ones that remained became more restricted, so even seasoned itemizers have switched over.
What’s more, there have been several itemizable expenses that are now eliminated from being tax deductible. However, there are still a few itemized tax deductions one can take advantage of in 2019. We’ll discuss some of them below:
If you’re an American homeowner, the chances of a mortgage are quite high. The mortgage interest deduction is still left intact after the Tax Cuts and Jobs Act passed. On the downside, this won’t be as valuable a deduction as it once was.
Basically, a homeowner will be able to deduct the mortgage interest up to about $750,000 of the personal residence debt on their first and second homes, if any. The former limit was $1 million, which also included $100,000 for home equity debt.
The interest deduction for home equity debt is non-existent now and has been so since 2018. Still, if you’ve used home equity loan to improve that particular home, you can qualify it as a residential loan and use it in the $750,000 limit.
As you own a home, you also pay property taxes. The same goes for when you own a car, airplane, boat, or any other major personal property. This property tax counts as an itemized deduction. Along with the income and sales tax deductions, this is called the SALT (state and local taxes) deduction.
The SALT deduction was not left unscarred by the Tax Cuts and Job Act. The Act limited these deductions as a whole to $10,000/year. This means that your valuable property may not give you the ability to claim a high tax return anymore. Owning property within a high-tax area is also going to limit your deductions.
Above-the-Line Tax Deductions
These tax deductions are applicable to most American households whether they opt for standard or itemized deductions. On the bright side, most of these survived the huge tax reforms. A home office deduction is among the ones that made it through, so we’ll discuss that below.
Home Office Deduction
More and more people are setting up a workspace in their home nowadays. If you use that portion purely for business purpose, you might be able to deduct the expenses regarding its use from your taxable income. However, you do need to meet a couple of requirements in order to be eligible for this deduction. The first one is that the home office must be used on the regular basis and only for business. For instance, having a work laptop in your bedroom does not qualify as a home office.
The second requirement is that this home office must be your principal business place. This is usually only possible when you’re self-employed or working mostly as a freelancer. However, there have been some situations where contracted employees were allowed to deduct their home office expenses as well.
The home office deduction is calculated in two ways. A relatively simple method merely deducts $5 for every square foot the home office takes up. The maximum space eligible for deduction here is 300 square feet. A more detailed but complicated process is to deduct every operating cost of the home office, including the maintenance, utilities, and housing payment. You’ll have to weigh up both methods to see which one is more financially beneficial.
Before 2018, tax deductions were much more in number than they are now. These include the deductions for tuition and fees, casualty and theft, employee expenses left unreimbursed, transportation, employer-subsidized parking, and many others. There are some exceptions and tax breaks to dull the blow, but the loss might still hurt the final results. In case you’re confused about which tax deduction you’re qualified for, a tax professional should be of help.