Is Home Equity Loan Interest still Deductible?
The Tax Cuts and Jobs Act has resulted in questions from taxpayers about many tax provisions including whether interest paid on home equity loans is still deductible. The good news is that despite newly-enacted restrictions on home mortgages, taxpayers can often still deduct interest on a home equity loan, home equity line of credit (HELOC) or second mortgage, regardless of how the loan is labeled.
The Tax Cuts and Jobs Act of 2017, enacted December 22, 2017, suspends the deduction for interest paid on home equity loans and lines of credit, unless they are used to buy, build or substantially improve the taxpayer's home that secures the loan. This suspension is in effect from 2018 through 2025.
Under the new law, for example, interest on a home equity loan used to build an addition to an existing home is typically deductible, while interest on the same loan used to pay personal living expenses, such as credit card debts, is not. As under prior law, the loan must be secured by the taxpayer's main home or second home (known as a qualified residence), not exceed the cost of the home and meet other requirements.
New dollar limit on total qualified residence loan balance
For anyone considering taking out a mortgage, the new law imposes a lower dollar limit on mortgages qualifying for the home mortgage interest deduction. Beginning in 2018, taxpayers may only deduct interest on $750,000 of qualified residence loans. The limit is $375,000 for a married taxpayer filing a separate return. These are down from the prior limits of $1 million, or $500,000 for a married taxpayer filing a separate return. The limits apply to the combined amount of loans used to buy, build or substantially improve the taxpayer's main home and second home.
Five Facts about the Additional Medicare Tax
Some taxpayers may be required to pay an Additional Medicare Tax if their income exceeds certain limits.
Here are some things that you should know about this tax:
1. Tax Rate. The Additional Medicare Tax rate is 0.9 percent.
2. Income Subject to Tax. The tax applies to the amount of certain income that is more than a threshold amount. The types of income include your Medicare wages, self-employment income and railroad retirement (RRTA) compensation. See the instructions for Form 8959, Additional Medicare Tax, for more on these rules.
3. Threshold Amount. You base your threshold amount on your filing status. If you are married and file a joint return, you must combine your spouse’s wages, compensation or self-employment income with yours. Use the combined total to determine if your income exceeds your threshold. The threshold amounts are:
Married filing jointly: $250,000
Married filing separately: $125,000
Head of household: $200,000
4. Withholding/Estimated Tax. Employers must withhold this tax from your wages or compensation when they pay you more than $200,000 in a calendar year. If you are self-employed you should include this tax when you figure your estimated tax liability.
5. Underpayment of Estimated Tax. If you had too little tax withheld, or did not pay enough estimated tax, you may owe an estimated tax penalty. For more on this, please call.
6. Form 8959. If you owe this tax, file Form 8959, Additional Medicare Tax, with your tax return. You also report any Additional Medicare Tax withheld by your employer on Form 8959.
For more information about deducting interest on home equity loans or the new tax law, or if you have any questions about the Additional Medicare Tax, help is just a phone call away.
With over 30 years’ financial expertise, Todd Hickman co-hosts a weekly financial radio show on NewsTalk 560AM KLVI in Beaumont, Texas and Talk 1370 AM KJCE in Austin, Texas. You can reach Todd during the week at 409-840-6900 or by visiting his company’s website at http://savemyretirement.com. Asset Growth Associates is celebrating its 20th year in business.
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