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The 2019 Tax Deduction Cap: 5 States Most Likely to Be Hit the Hardest

DataTree Insights: The 2019 Tax Deduction Cap: 5 States Most Likely to Be Hit the Hardest

According to the National Association of Realtors, nearly 75 percent of buyers finance a mortgage to help them with their home purchase. However, new tax deduction changes may affect that number greatly in the upcoming year. As a mortgage lender, it’s important to know which states will be impacted the most in order to best serve your clients. This article will dive into what the upcoming tax deduction changes are and which five states will be affected the most in 2019. 

What Do the 2019 New Tax Deductions Mean for Homebuyers?

Last year in December 2017, Congress passed the Tax Cuts and Jobs Act, aiming to reduce the amount of taxes an individual pays to the federal government in the next two years. 

Part of that tax reform involves limiting the amount of state and local income, sales and property tax (SALT) deductions an individual can itemize on his or her taxes. So for high tax states, like New York and California, an individual with an income of $100,000 a year would pay, say $20,000 total in taxes, and in turn was able to itemize their tax bill and deduct the entire $20,000 in taxes. However, with the new bill, the SALT tax cap for those individuals is now at $10,000. On the other hand, individuals who chose not to itemize their taxes can opt for the standard deduction. Before, the standard deduction was $6,500, but the new bill increased the standard deduction to $12,000. Therefore incentivizing taxpayers to opt for the standard deduction rather than itemizing their taxes. 

In addition, the new tax bill also places a cap on the mortgage interest deduction for homebuyers. The cap on the principal for interest deductions went from $1 million to $750,000 and below, which means that high net worth individuals are no longer able to write off their mortgage interest payments on their income taxes.

Who Will be Affected the Most?

With changes to the tax deduction cap combined with 2019 SALT deductions cap, mortgage lenders will need to prepare for the change in their potential clients’ home-buying decisions. The reduction in both mortgage interest and property tax deductions, there will be less of an incentive to buy a home, and therefore less of a need to seek out the help of a mortgage lender. Specifically, lenders with clients owning or seeking to own homes between $750,000 and $1 million and lenders with investments in high-tax states will be affected the most. Let’s take a look at the five highest taxed states along with each state’s average home value, average household income and the average amount of taxes a homebuyer pays compared to how much they will pay once the 2019 tax deductions are put into place.

California: The Golden State

Average home value: $522,000

Average household income: $64,500

Average federal income taxes paid: $8,200

Average SALT paid by homebuyers: $7,500

Using the numbers above, a California homeowner is able to deduct $15,700 on their taxes under the current law. However, once the 2019 deduction cap is put into place, California homeowners will only be able to deduct $10,000, almost $6,000 less than what the current law allows. Therefore, the best option for a California homeowner under the new law would be to opt for standard deduction since they are able to deduct up to $12,000.

Maine: The Pine Tree State

Average home value: $199,800

Average household income: $51,500

Average federal income taxes paid$5,400

Average SALT paid by homebuyers: $6,000

Using the numbers above, a Maine homeowner is able to deduct $11,400 on their taxes under the current law. However, once the 2019 deduction cap is put into place, Maine homeowners will only be able to deduct $10,000. 

Massachusetts: The Bay State

Average home value: $397,000

Average household income: $70,600

Average federal income taxes paid: $9,800

Average SALT paid by homebuyers: $8,100

Using the numbers above, a Massachusetts homeowner is able to deduct $17,900 on their taxes under the current law. However, once the 2019 deduction cap is put into place, Massachusetts homeowners will only be able to deduct $10,000. Therefore, the best option for a Massachusetts homeowner under the new law would be to opt for standard deduction since they are able to deduct up to $12,000 losing a little under $6,000 as opposed to almost $7,000. 

New Jersey: The Garden State 

Average home value: $342,000

Average household income: $72,200

Average federal income taxes paid: $10,400

Average SALT paid by homebuyers: $10,000 

Using the numbers above, a New Jersey homeowner is able to deduct $20,400 on their taxes under the current law. However, once the 2019 deduction cap is put into place, New Jersey homeowners will only be able to deduct $10,000. Therefore, the best option for a New Jersey homeowner under the new law would be to opt for standard deduction since they are able to deduct up to $12,000 losing about $8,000 as opposed to almost $10,000. 

New York: The Empire State

Average home value: $318,000

Average household income: $60,900

Average federal income taxes paid: $7,600

Average SALT paid by homebuyers: $7,900

Using the numbers above, a New York homeowner is able to deduct $15,500 on their taxes under the current law. However, once the 2019 deduction cap is put into place, New York homeowners will only be able to deduct $10,000. Therefore, the best option for a New York homeowner under the new law would be to opt for standard deduction since they are able to deduct up to $12,000 losing about $3,000 as opposed to $5,000.

Takeaway

With the new tax plan, homeowners in higher tax states will be incentivized to opt for the standard tax deduction instead of itemizing their taxes since the standard deduction is now at $12,000, while the deduction cap is at $10,000. For more information and property data across the United States, get in touch with DataTree today. 

 

*Average home value is based on the median home property values from 2017 and rounded to the nearest 1000, courtesy of the National Association of Realtors

 **Average household income is based on the median household income from 2017 and rounded to the nearest 100, courtesy of Time Money

***Average federal and SALT numbers are based on values from 2017 and rounded up to the nearest $100, courtesy of CNBC 

 
 
 
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