By Sarah Friedmann
The idea of an imminently approaching tax deadline can spark anxiety for some Americans. Tax return anxiousness may be especially prevalent this year, as taxpayers are filing their first returns that will be affected by the Tax Cuts and Jobs Act of 2017. In fact, homeowners are among those who could stand to be most profoundly impacted by tax code changes, especially because of the new limit on the State and Local Tax (SALT) deduction and new caps on other homeownership-related deductions. As taxpayers continue to file their returns and the full implications of tax reform are realized, it’s important to take a look at how these new tax policies could affect American homeownership now and in the future.
The Tax Cuts and Jobs Act of 2017 introduced multiple changes to the deductions Americans can file on their tax returns. Many taxpayers choose to take the standard deduction on their returns – which is now set at $12,000 for single filers. Though, others, especially homeowners, choose to itemize their deductions if their total deductions are larger than the standard deduction.
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The Tax Cuts and Jobs Act introduced limits to one key itemized deduction taken by some homeowners – the SALT deduction. This deduction allows taxpayers to subtract their state and local income and property taxes OR their property and sales taxes from their taxable income on their federal tax returns, reducing their overall tax burden. Prior to 2017’s tax reform, there was no limit on the SALT deduction amount that a taxpayer could take. Now, filers are capped at a $10,000 SALT deduction for married couples filing jointly and $5,000 for single filers, NerdWallet reported.
In addition to limiting the SALT deduction, the Tax Cuts and Jobs Act also set a cap on the mortgage interest deduction and eliminated the deductibility of home equity loans, both of which also disproportionately affect homeowners by cutting the tax benefits associated with homeownership. As a result, for homeowners and potential homeowners, 2017’s tax reform could result in some serious changes. “The new tax regime will fundamentally alter the benefits of homeownership by nullifying incentives for individuals and families,” Elizabeth Mendenhall, the Immediate Past President of the National Association of REALTORS® (NAR), said in a statement after Congress passed the Tax Cuts and Jobs Act, per Governing.com.
Homeowners Feel the Pinch
The introduction of a SALT cap may have negative implications for some homeowners, which could also more broadly affect the real estate industry as a whole. The IRS reported in an audit in February 2019 that around 11 million tax payers will lose approximately $320 billion in federal tax deductions due to the SALT deduction limit. CBS News noted that the Tax Foundation found that 80 percent of filers who are affected by this SALT deduction change live in households earning over $100,000 per year. Therefore, the good news is that the SALT cap won’t affect most Americans and homeowners. However, it could have an unexpectedly detrimental impact on middle-class homeowners living in high-tax areas. Moreover, it could also start to impact many more homeowners over time, because the SALT cap isn’t indexed for inflation.
Kevin Brown, Regional Vice President of the National Association of REALTORS® described some of these problematic linkages between homeownership and the new SALT cap during his testimony to the House Ways and Means Select Revenue Measures Subcommittee in February 2019. As Brown noted:
<p>While there will be some homeowners inevery state that are pinched by the new SALT cap, it will be a non-factor forthe majority of homeowners in the nation. That is, at least for the immediatefuture … the new SALT limitation was not indexed for inflation. So, as taxesnaturally rise with inflation and other economic factors, more and more currentand prospective homeowners will be caught by the new cap and will see theamount of tax benefits of owning a home go down. Despite the situation thatmost of the nation is not immediately affected by [deduction changes] … thefact remains that millions of homeowners in the higher-housing-cost areas ofthe nation will be negatively impacted by the changes. And many of these willbe members of the middle-class living in homes that are far from large andlavish.</p>
Notably, current homeowners who live in high-tax areas – which often have booming housing markets – are likely to feel some of the hardest tax hits from SALT limitation. In places like California and New York, where both home values and taxes are high, homeowners will only be able to deduct a limited amount of SALT taxes, even though their SALT payments may exceed this amount. This could lead to higher tax bills for homeowners in these locations, Business Insider described. Moreover, the outlet added that these potentially higher tax bills could slow real estate market growth in these areas.
In the long term, these federal taxation implications may push some current homeowners to leave high- tax states, as well as disincentivize others from moving to them. “I think at a very basic level, homeowners in high-tax, high-property value states will likely feel like they were dealt a bad hand by the Tax Cuts & Jobs Act because many of them will have lost a large itemized deduction …, Riley Adams of the Young and Invested, a financial independence blog, told Business Insider. “[However], it all depends on their individual tax situation.”
While there’s sometimes a perception that the SALT cap only affects wealthy homeowners because of the findings of the IRS’ most recent audit, some taxpayers are insisting that this isn’t the case. In fact, CBS News reported on March 20 that middle class homeowners are feeling a financial sting from the cap – and worry about its long-term implications.
Kate Fawcett, a homeowner who resides in Glen Ridge, New Jersey, discussed these concerns with the outlet. “The rest of the country thinks [the SALT cap] is only affecting people who are wealthy and who can afford it, but we know it's not just the case,” she said. “This is just going to wipe us out.”
Fawcett told CBS News that she and her family reside in a three bedroom, two bathroom house in Glen Ridge, New Jersey. They are paying $27,000 in property and local taxes, meaning they can’t deduct $17,000 of this amount from their federal tax bill because of the new SALT cap. As a result, the Fawcett family, who received a federal tax refund of around $1,000 last year, is now facing a tax bill of over $5,000. Fawcett said that this change in her family’s federal tax burden is making her seriously consider moving to another location. “It's a huge impact … It really changed how we think about staying in this town,” she told the network.
States Fight Back … With Limited Success
Some high-tax states are so concerned about homeowners leaving due to SALT limit-induced federal tax burdens that they have been lobbying to reform or remove the cap. In New Jersey, New York, Oregon, and Connecticut, state lawmakers developed SALT cap workarounds to try to help ease the federal tax burden for their state’s residents. These workarounds generally allow taxpayers to receive state tax credits for charitable donations, which taxpayers can hypothetically deduct separately on their federal returns and, therefore, offset deduction losses associated with the State and Local Tax cap, Credit Karma reported.
However, the impact of these state-based initiatives may be limited. In December 2018, the Internal Revenue Service (IRS) released draft guidance on making charitable contributions in exchange for state or local tax credits. As Christy Rakoczy Bieber of Credit Karma described, “The IRS guidance makes clear that if taxpayers receive state or local tax credits in exchange for donations, they’ll be required to reduce the charitable deduction claimed on their federal returns by the amount of the state or local credit — unless the credit they receive is 15% or less than the donation amount.” Therefore, many of these aforementioned state reforms will likely achieve limited results in light of the IRS’ proposed rules.
However, this could eventually change if state challenges to the rules are successful. TaxNotes.com reported that former Treasury Assistant Secretary for Tax Policy, Leslie Samuels, predicted that states will again sue the IRS once the agency finalizes the rules banning these SALT cap workarounds
At the federal level, around 40 members of Congress are co-sponsoring the “Stop the Attack on Local Taxpayers” Act, which would seek to offset the tax burden created by the SALT cap through reintroducing the 39.6 percent marginal tax bracket that was eliminated in 2017’s tax reform legislation. However, as Forbes reported in March 2019, the bill seems unlikely to get enough votes to pass, as Republicans are concerned about interfering with the president’s tax reform initiative, while some Democrats don’t want to support legislation that some see as only benefitting wealthy Americans.
Looking to The Future
As homeowners navigate the tax code changes associated with the Tax Cuts and Jobs act ahead of Tax Day, homeownership advocates, including the NAR, are working to find ways to diminish the financial impact of the SALT cap. However, recent advocacy efforts have demonstrated that this isn’t an easy endeavor, considering that the SALT limitation funds a significant portion of other tax savings associated with the Tax Cuts and Jobs Act, Forbes noted. As they continue to work to ensure that homeownership isn’t disincentivized by tax reform, homeownership advocates will likely need to take a creative and multisecotoral approach to advancing policy solutions.
