The passing of the 2017 Tax Cuts and Jobs Act (TCJA) introduced many changes for taxpayers. Of significant importance for U.S. taxpayers abroad were the repatriation provisions under IRC §965 and the introduction of the new Global Intangible Low Taxed Income (GILTI) regime under IRC §951A. We have discussed and will continue to discuss these provisions as necessary.
A major selling point, of the legislation, was the simplification of the tax filing process for many individual taxpayers. Individual taxpayers, regardless of their filing status, can reduce their taxable income by claiming the larger of itemized deductions or the standard deduction. The TCJA (almost) doubled the level of the standard deduction. It has been estimated that the number of individuals claiming the standard deduction in 2018 will increase from 70% of returns to approximately 90% of returns. The 2018 standard deduction (before and after the enactment of the TCJA) were
| Single | $6,500 | $12,000 |
| Head of Household | $9,550 | $18,000 |
| Married Filing Jointly | $13,000 | $24,000 |
These amounts are indexed for future years.
U.S. persons living abroad have always been taxable on their worldwide income. Conversely, by and large, they have always been able to claim worldwide expenses. The TCJA made changes as to what and how much housing expenses can be claimed as itemized deductions. Many taxpayers will find, that because of the increase in the standard deduction and the corresponding decrease in the ability to deduct certain itemized deductions (as discussed below), that they too will claim the standard deduction rather than itemizing.
Two of the most common itemized deductions relate to mortgage interest and real estate taxes.
Mortgage interest
In general, no deduction is allowed for personal interest paid or accrued during the taxable year. The Internal Revenue Code, however, has statutory exceptions – one of the most important being for “qualified residence interest”. As such, taxpayers may deduct, as an itemized deduction, qualified residence interest up to statutory limits. Qualified residence interest includes:
- interest on acquisition indebtedness and
- home equity indebtedness
with respect to any qualified resident of the taxpayer.
Acquisition indebtedness is defined as mortgage debt used to acquire, build, or substantially improve the taxpayer’s primary residence (or a designated second residence), and secured by that residence.
Historically taxpayers were able to deduct mortgage interest on up to US $1,000,000 of home acquisition indebtedness. As of January 1, 2018, taxpayers will be able to deduct the interest they pay on their mortgages up to US $750,000 in new mortgage debt. Married couples filing separately can claim up to US $375,000 each in mortgage interest deductions. This is a decrease of the former limit of $1 million for single filers and married couples filing jointly, and $500,000 for married couples filing separately.
Mortgage Interest Deductibility – By the Numbers
- Interest payments are deductible on mortgage debt of up to US $750,000—formerly US $1,000,000
- Married couples filing separately can deduct interest on mortgage debt up to US $375,000 each—formerly US $500,000
- Up to 2025, these new limits won’t apply to mortgages originated before December 15, 2017
- Deduction for other home equity debt (HELOCs and second mortgages) eliminated—formerly US $100,000
In the short term, these changes only affect people who take out new purchase mortgages. Houses purchases that were under a binding written contact by December 15th and which closed by January 1, 2018 are also eligible for the $1,000,000 threshold. These changes sunset as of December 31, 2025 (unless Congress acts to make these changes permanent).
The TCJA also completely eliminated the deduction for interest paid on other home equity debt. Previously, taxpayers could deduct up to $100,000—$50,000 for married couples filing separately—on the interest payments for home equity loans and home equity lines of credit (HELOCs).
IRS News Release IR-2018-32
The IRS, in news release IR-2018-32, provides the following examples of the mortgage interest deduction –
Example 1: In January 2018, a taxpayer takes out a $500,000 mortgage to purchase a main home with a fair market value of $800,000. In February 2018, the taxpayer takes out a $250,000 home equity loan to put an addition on the main home. Both loans are secured by the main home and the total does not exceed the cost of the home. Because the total amount of both loans does not exceed $750,000, all of the interest paid on the loans is deductible. Your mortgage interest deduction is not limited.
However, if the taxpayer used the home equity loan proceeds for personal expenses, such as paying off student loans and credit cards, then the interest on the home equity loan would not be deductible.
Example 2: In January 2018, a taxpayer takes out a $500,000 mortgage to purchase a main home. The loan is secured by the main home. In February 2018, the taxpayer takes out a $250,000 loan to purchase a vacation home. The loan is secured by the vacation home. Because the total amount of both mortgages does not exceed $750,000, all of the interest paid on both mortgages is deductible. Your mortgage interest deduction is not limited.
However, if the taxpayer took out a $250,000 home equity loan on the main home to purchase the vacation home, then the interest on the home equity loan would not be deductible.
Example 3: In January 2018, a taxpayer takes out a $500,000 mortgage to purchase a main home. The loan is secured by the main home. In February 2018, the taxpayer takes out a $500,000 loan to purchase a vacation home. The loan is secured by the vacation home. Because the total amount of both mortgages exceeds $750,000, not all of the interest paid on the mortgages is deductible. A percentage of the total interest paid is deductible (see IRS Publication 936). In other words, your mortgage interest deduction is limited.
Real Estate Taxes
There were two significant changes with respect to real estate taxes. First, the total of all state and local income taxes and property taxes are limited to a maximum of US $10,000. For many U.S. taxpayers who do not reside in the United States and who do not pay any U.S. state and local income tax this restriction just impacts their ability to deduct their property taxes. The second significant change, however, is that foreign property taxes are no longer eligible as an itemized deduction.
The ability for U.S. persons abroad to claim itemized deductions has been severely limited. As such, many taxpayers will just claim the increased standard deduction.
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