Depending on your personal tax situation, you may have noticed that you are no longer benefiting from itemized deductions on your personal tax return when you always used to. What happened? The Tax Cuts and Jobs Act of 2017 (TCJA) introduced significant changes to the U.S. tax code, including new limitations on mortgage interest and state and local tax (SALT) deductions. Living in New York, and more specifically on Long Island or New York City suburbs, this change had a momentous impact on families and individuals. The median home value on Long Island is around $817,000, much higher than the national average. This results in more mortgages exceeding prescribed limits, which ultimately reduce the allowable interest deduction on a taxpayer's return. To add insult to injury, these same homeowners face some of the highest property taxes in the country, which often exceed the new deductible limit. This article will explore these specific limitations imposed and how they impact taxpayers.
Under the prior tax law, taxpayers could deduct interest paid on new cumulative mortgages of up to $1 million if married filing jointly (MFJ) for a primary residence and a second home. The TCJA reduced this limit to $750,000 (MFJ) for new mortgages taken out after December 15, 2017. Additionally, the TCJA eliminated the deduction for interest paid on home equity loans and lines of credit, unless the proceeds are used to improve the home. This means that taxpayers can no longer deduct interest paid on home equity loans used for other purposes, such as paying off credit card debt or funding a vacation. Mortgages on rental properties are still fully deductible.
Under the prior tax law, taxpayers could deduct the full amount of state and local income, sales, and property taxes on their federal tax returns. The TCJA introduced a new limitation on these deductions, capping them at $10,000 per year.
This limitation has a significant impact on taxpayers in high-tax states like New York, California, and New Jersey, where property taxes alone can easily exceed $10,000 per year and individual tax rates are staggeringly high. It's worth noting that the $10,000 cap applies to the combined total of state and local income, sales, and property taxes. For example, a taxpayer making $100,000 paying approximately $7,000 in NYS income tax and $12,000 in property taxes would have previously benefitted from a $19,000 tax deduction and is now capped at $10,000 total.
The mortgage interest and state and local tax deduction limitations have significant implications for taxpayers. Taxpayers who own high-value homes or multiple properties may see a reduction in their mortgage interest deduction, while those in high-tax states may be limited in their ability to deduct state and local taxes. Taxpayers who previously itemized their deductions may find that taking the standard deduction is now more beneficial, as the standard deduction in 2023 will be $13,850 for single filers and $27,700 for married couples filing jointly.
Thankfully, many high-taxed states have responded to the SALT limitation changes by introducing a Pass-Through-Entity-Tax (PTET) election, which allows partnerships and S corporations to circumvent the federal $10,000 deduction limit. PTET allows partners, members, or shareholders of an eligible entity who are subject to state income tax to pay the state tax on business income at the entity level rather than personally, reducing federal income passed through to the owners, while also receiving a credit on the state return.
When the mortgage interest and state and local tax deduction limitations were first introduced by the TCJA they had significant implications for taxpayers. Couple that with the recent boom in the housing market, it is only foreseeable that mortgages will continue to outpace the current $750,000 limit. Taxpayers living on Long Island and other higher taxed areas lost two tax deductions which were commonly used. It’s important for taxpayers to seek professional advice and review their financial situations to ensure that they are maximizing their tax benefits while staying compliant with the current tax laws.
If you're a homeowner in Long Island, NY, and want to find out how to maximize tax savings next year, request a consultation with our experienced tax planning accountants today. We look forward to helping you save money!
