Tax Rule Changes… Second Bite!

We`ll have lots to discuss over the next few weeks and months about the actions you might need to take because of the sweeping tax code changes.  The last topic was changing how you make your contributions to charity by doing direct transfers rather than the traditional, now old fashioned and less effective, way.

Today we want to “tackle” (yup super bowl Sunday influences the bloggers) something that affects a large part of the population: mortgages!

Like our charitable conversation two blogs ago, the mortgage interest deduction is also claimed on schedule A, so the first observation is that many people will simply no longer get any value from their mortgage interest because the new standard deduction is twice as much as before.  Then, the next mortgage topic; second mortgages and Home Equity Lines of Credit  (HELOC) are no longer deductible at all.  When “HELOC” interest became deductible they were not so common and had smaller balances but over the last several years they have become a popular way to fund the giant college spending needs for many, and for others they have become a popular way to finance vacation homes and even investment property, due to low interest rates and low closing costs.

So, what do you do to fix this problem?

First, relax, because the changes are not necessarily going to mean an increase in taxes at all.  In fact, many people, if this was an isolated topic, will still see a lower tax bill because of the huge increase in the standard deduction.   However, anyone with a large amount of HELOC debt should sit down with a tax planner and look at alternatives.  People who used HELOCs to pay for college or are currently using it because they felt they would not qualify for student loans may now want to find a college planner and really try hard to find that kind of loan, as they are deductible on a part of the tax return that is not connected to schedule A, so they can enjoy that deduction as well as the big increase in the standard deduction.  People who used it for investment property might go and seek out a commercial mortgage to replace the HELOC, even with generally higher rates and closing costs.  Moving the interest to a line expense on a schedule E and off schedule A might more than make up for the cost associated with getting it done.

There are also many less well known but very smart bank products out there to replace both traditional mortgages and HELOCs and put them together in an “All in One Loan”, which is a primary mortgage, so fully deductible  but also leaves HELOC like access to equity for that college funding.  More importantly, it applies payments to principle first, before interest, helping people to pay off a home potentially much faster than a traditional mortgage without making larger payments.  See http://www.aiosim.com/Simulator/GetStarted for additional information.

Lastly, the mortgage interest deduction is now limited to the first $750,000 in principal loan amount (it was previously a $1,000,000 limit).  That’s not a problem for people who had already established those mortgages before December of 2017, as they are grandfathered.  Going forward, it is simply “buyer beware” that $750,000 is the new deduction limit.  If you can afford a million dollar plus home then you are likely smart enough to find a creative way to put in enough cash to only end up with a $750,000 loan.  The tax law doesn’t keep you from buying a 1.5 million dollar home, you simply need to put down $750,000 to not be effected by the limitation.

And because as I write this I can hear the wheels turning, UNDER NO CIRCUMSTANCES would it ever make sense to take money from pretax accounts like 401(k)s to pay down mortgages or fund refinances or purchases.  The lack of a deduction would be a small penalty in comparison to the financial suicide of taking retirement money out while working.

So, what is the summary of the information dump above?  Go see a tax planner (not just a preparer) and sit down and let them help you figure it out!