Who is better named to write an article on buying a house than Sarah Skidmore Sell? According to Muck Rack, she is the national personal finance reporter for the Associated Press. The article in our local paper, Tough Market For Buyers, isn’t listed at Muck Rack or the local paper (so they don’t get a cite).
Anyways, Sarah discusses that home supplies are down, prices are up, interest rates are up and the tax laws is less generous. She is right about tax laws and mentions that interest deduction is now limited to the first $750,000 (down from a million) and deductions for state and local taxes are limited to $10,000.
Sidebar One: Here in flyover country it is very difficult to find a $937,500 house. That is the price that would result in a $750,000 mortgage after a 20% down payment. The $10,000 limitation is more likely to have an impact on us folks in the middle of the continent but unless you have a big income and a big house with big mortgage then the impact will be small or nothing. End Sidebar One.
OK but the big difference for most folks is doubling the standard deduction from $12,000 to $24,000 for married filing jointly. The number of folks itemizing deductions will be substantially reduced and the reduction in tax rates will reduce the impact of deductions above the standard even more. This study by Sean Lowery from the Congressional Research Service using 2014 data shows that 30% of taxpayers itemized in 2014 and taxpayers with AGI between $100,000 and $200,000 averaged itemized deductions of $25,598.
For example, if a couple earned $150,000 and had itemized deductions of $25,600 [just above Sean’s average], under the old tax law they could reduce their taxes by $3,400 (($25,600-$12,000)) * 25%) compared to taking the standard deduction.
Sidebar Two : Yes $12,000 was the standard deduction in 2017 and $24,000 is the standard deduction in 2018 so the comparison is off by a few dollars but it rounds more easily. End Sidebar Two.
Now with a standard deduction of $24,000 and lower tax rates the tax savings in our example would be 22% of $1,600 or $352. Almost everyone will see an overall tax reduction from the new law but the value of itemization will be substantially reduced or eliminated for many. That is OK as simplification is a good thing. Sarah should have commented on that change because it affects the most folks.