Determine if you live in a high tax state.
If you live in a high tax state, the new tax code may have a weightier impact on you. To find out if you are in a high tax state, look here (residents of California, New York, or Connecticut will likely be impacted the most, depending on the family’s income and size). That’s because all existing homeowners and homebuyers would lose the ability to write off state and local taxes – including property taxes – from their federal taxes. All homeowners would be able to keep deducting their mortgage interest as long as their total itemized deductions are greater than $24,000 and the mortgage balance does not exceed $500,000. Because the new tax bill would eliminate the state and local income taxes or sales tax deductions, you may end up being pushed into a higher bracket. Now is a good time and figure out your new equation.
But here’s a tip: Any property tax payments made during the 2017 calendar year can be deducted from your 2017 taxable income. If you pay your property taxes through an escrow account, this will involve speaking with your lender to see if an early payment is possible, or if penalties apply for prepayments or escrow adjustments.
Pay your January mortgage in December.
As mentioned above, if you’re a homeowner, you can increase your deductions if you make an early payment. Dan Green, a former loan officer and founder of Growella, a financial education website for millennials, has a tip for increasing your deduction while it still makes sense. “Make your January 2018 mortgage payment while the calendar still reads December…[This is] an especially helpful tactic for a commissioned salesperson who had a good year and for attorneys who work on contingency,” he says.
Start planning your deductions.
The Senate bill nearly doubles the standard deduction from $11,700 to $24,000, meaning fewer high-income people will need to itemize their deductions. A bigger deduction may sound great, but it comes at the potential loss of two big tax benefits: state and local tax deductions and the mortgage-interest deduction (for mortgages higher than $500,000). Again, this comes down to where you live, how big your mortgage is and whether or not you will itemize your taxes. As the plan evolves, you’ll want to watch to see if the final plan eliminates the state and local tax deduction.
Consider your next move carefully.
Since the financial benefits of buying are shrinking, if you’re a renter, consider renting a little longer. The biggest obstacle for new homebuyers is a down payment, but if the new tax laws help you save money, this could be a good time to save up.
In addition, homeowners considering turning their primary residence into a rental property in the near future may want to stay put a little while longer. Proposed changes would require homeowners live in their home for five of the last eight years—instead of the current two out of five years—in order to be excluded from paying capital gains.