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Property Taxes, Mortgage Interest & Your IRS Bill

Mortgage Interest and Property Taxes: Maximizing Tax Deductions and Navigating the SALT Deduction Limitation
Owning a home is a significant financial milestone. One of the often-overlooked benefits is the potential tax advantages. Mortgage interest and property taxes can significantly reduce tax liability for certain households – particularly those giving significant amounts to charity, paying significant mortgage interest and/or experiencing significant medical bills.
Understanding how these deductions work can be of material importance, especially as we await Washington’s determination surrounding the future of TCJA. Ponte Vedra, Nocatee, Atlantic Beach, San Marco, Ortega and beyond are full of beautiful homes demanding significant price tags. These relevant tax laws impact the ongoing net cost of ownership.
This post breaks down some key facts and figures you need to know to better navigate your financial and tax planning moves this year.
How Mortgage Interest and Property Taxes Lower Your Tax Bill
Before the Tax Cuts and Jobs Act of 2017, homeowners could deduct the full amount of mortgage interest paid on their primary residence (and a second home in some cases) and all their property taxes from their federal taxable income. This “itemized deduction” reduced the amount of income subject to federal income tax, leading to potentially significant tax savings.
- Mortgage Interest Deduction: This deduction applies to the interest portion of your mortgage payments. In the early years of a mortgage, a larger portion of your payment goes toward interest, making this deduction particularly valuable.
- Property Tax Deduction: Homeowners can deduct the property taxes they pay on their primary residence. In areas with high property values, like Ponte Vedra, Nocatee, San Marco, Jacksonville Beach and Atlantic Beach, this deduction could be substantial.
The Impact of the SALT Deduction Limit
The Tax Cuts and Jobs Act introduced a significant change: a $10,000 limit on the amount of state and local taxes (SALT) that can be deducted. This cap includes both property taxes and state income taxes.
While the TCJA giveth the tax payer generally larger tax brackets and lower tax rates…the TCJA taketh unlimited deductions for Sales And Local Taxes, as well as an unlimited mortgage interest deduction.
Fortunately, the net effect these deduction limits have for Florida residents is considerably less than the effect for residents of states with state income taxes and higher property taxes: like New Jersey, New York and Pennsylvania.
Nonetheless, this change can still impact Florida residents with high property tax bills and mortgages beyond $750,000 as well as those who weathered considerable sales tax during the year – think luxury car purchases.
How This Affects Jacksonville Homeowners
Affluent communities in Greater Jacksonville are known for their desirable locations and beautiful homes, which often come with higher price tags and, consequently, higher property taxes. Ponte Vedra, Nocatee, San Marco, Jacksonville Beach, Atlantic Beach, Deerwood and St. Augustine all contain pockets of these high-end homes.
For these homeowners, annual property taxes alone can approach, or even exceed, the $10,000 SALT deduction limit, rendering their ‘sales taxes paid’ amount a useless factor for income-tax’ sake.
Example: The SALT Deduction Squeeze
Imagine a family in Ponte Vedra with a $1,500,000 home and a $12,000 annual property tax bill plus $7,000 in sales tax paid associated with a Jeep Grand Wagoneer, or similar purchase during the year. Outside of TCJA, they could deduct the full $19,000. Now, they’re limited to a $10,000 deduction, meaning $9,000 is no longer deductible for federal income tax purposes.
This difference may increase their net tax bill. But of course, given how complex tax calculations are, it is also possible their tax bill decreased in other regions of the tax return by greater amounts than any savings lost in this section alone.
Just like with any financial planning and advice, taxes are extremely unique to each person and situation.
Why This Matters
This limitation disproportionately impacts homeowners in high-tax areas. It effectively increases the cost of homeownership, making it potentially more expensive to live in communities like Ponte Vedra, Nocatee, Jacksonville Beach and Atlantic Beach.
Families who purchased homes in 2016 and 2017, perhaps somewhat relying on the previous tax deduction rules, may now find themselves with a higher tax burden than anticipated. This can put a strain on household budgets and impact long-term financial planning.
Navigating the Changes
While the SALT deduction limitation is a reality, there are strategies homeowners can explore to potentially mitigate its impact. These include:
- Analyzing Itemized vs. Standard Deduction: Determine whether itemizing, even with the SALT cap, is more advantageous than taking the standard deduction.
- Tax-Efficient Investing: Focus on investment strategies that minimize your tax liability.
- Mortgage Review: While not directly addressing the SALT issue, it’s always wise to periodically review your mortgage terms and explore options like refinancing if it makes financial sense.
- Property Tax Assessment Appeals: If you believe your property tax assessment is too high, you may be able to appeal it.
Working with a Financial Advisor to Improve Tax Outcomes
Navigating the complexities of tax law is an ongoing effort that weaves into all other areas of planning. Forward-looking tax planning is a pillar of what we do for our clients.
Maybe, for your particular situation, a gift to your favorite church or charity is more impactful in one year than another. Maybe gifting stock straight from your portfolio is better than cash.
When you have someone in your corner who works alongside your accountant, keeping a watchful eye on changing tax law, these seemingly small adjustments can amount to material differences over a lifetime.
