The final GOP tax bill passed in late December, bringing with it much speculation about what type of changes to expect for 2018. Several sections of the bill will have a significant impact on California taxpayers and homeowners in particular, and are worth discussing with your tax professional to see what effects there could be to your finances in the upcoming years.
Key Income Features of the Tax Bill
While the 2018 tax bill is nearly 500 pages long, here are a few of the most notable changes.
Lower Tax Rate for Top Earners
All seven tax brackets will receive a reduction in the tax rate, including high earners. According to the Washington Post, “Under current law, the highest rate is 39.6 percent for married couples earning over $470,700. The GOP bill would drop that to 37 percent and raise the threshold at which that top rate kicks in, to $500,000 for individuals and $600,000 for married couples.”
No Individual Health Insurance Mandate
Starting in 2019, Americans won’t be required to buy health insurance, which also means there won’t be a penalty for the uninsured.
Higher Estate Tax Thresholds
Both individuals and married couples can expect a higher tax exemption when it comes to the “death tax.” The tax-free amount for the estate tax has increased “to a new $10 million base, good for tax years 2018 through 2025,” according to Forbes. “The exemption is indexed for inflation, so it looks like an individual can shelter $11.2 million in assets from these taxes. Another federal estate law provision called portability lets couples who do proper planning double that exemption.”
How the Tax Bill Could Affect Homeowners
There are a few provisions in the new tax bill that could affect homeowners during tax season.
Lower Property Tax Deduction Thresholds
One of the major changes likely to affect future California homeowners is the lower threshold for deducting mortgage interest on tax returns. CNN explained, “New homebuyers would now only be able to deduct interest on the first $750,000 of mortgage debt on a newly-purchased home… Current homeowners would not be affected by the lower cap.”
Immediate Effect on Mortgage Costs
While not specifically tied to the passing of the tax bill, current reports are showing that both refinance and mortgage applications have dropped from the start of the year due to a jump in mortgage interest rates.
“Applications to refinance a home loan, which are most rate-sensitive, fell 7 percent for the week and were 2.8 percent higher than one year ago, when interest rates were lower. The refinance share of mortgage activity decreased to its lowest level since July, 44.4 percent of total applications, from 46.5 percent the previous week,” according to CNBC.
We’ve seen a slight increase in mortgage rates as well. The article continues, “The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($453,100 or less) increased to its highest level since January 2014, 4.64 percent, from 4.57 percent, with points increasing to 0.61 from 0.59 (including the origination fee) for 80 percent loan-to-value ratio loans.”
Conforming loan limits have been raised for 2018, which could serve as a benefit for new homebuyers. The baseline limit for a one-unit property increased from $424,100 to $453,100. And in most high-cost areas including the Los Angeles and San Francisco markets, the maximum for the same type of property is now $679,650, up from $636,150.
We’ll continue to keep you updated with new changes and rate trajectories as we monitor the effects of the tax bill on mortgage rates this year. Feel free to reach out to one of our qualified mortgage bankers to let us know how we can help.