Low-income and middle-class homeowners might see their tax refunds shrink come 2018
The budget plan passed in the wee hours of the night on Friday not only put a quick end to the second shutdown of 2018 but also temporarily breathed life into several expired tax deductions. Under the plan many of these tax breaks were only extended retroactively for 2017. As such, their future remains uncertain.
Congress could end up extending these deductions again for 2018. They could do so anytime in the next year. However, as far as the IRS is concerned right now, these deduction are as good as dead — that is until Congress says otherwise.
One of the tax breaks that might have been done away with for 2018 and the years to come is the mortgage insurance deduction. If a homebuyer does not make a down payment of 20 percent or more, they are required to take out private mortgage insurance. From 2006 to 2017, homeowners were able to deduct their mortgage insurance premium payments. A majority of first-time homebuyers pay this insurance in addition to their mortgage and will be affected if this deduction is not renewed for 2018 before next year’s tax season.
The National Association of Realtors (NAR) and the National Association of Home Builders have been actively lobbying lawmakers to make sure this deduction is available.
“It helps improve affordability for entry level homebuyers,” explained Ken Fears, senior policy representative at the NAR. “Nearly 85 percent of first time homebuyers put down less than 20 percent. It’s critical for that portion of the market.”
Fears points out that these first time homebuyers are not just low- and moderate-income buyers.
“It’s the vast majority — even middle- and upper-middle income first homebuyers are using these programs,” he said. “It really speaks to that where people are in their life when you’re younger. You have lower incomes. You have more debt, student debt. You’re climbing the ladder with a lot of headwinds. And that’s why these kind of programs are very important, [because] it’s harder to build up those down payments.”
Monthly payments for private mortgage insurance can range from $100 to $300.
“At the end of the year if you had a $200,000 mortgage and you are in the 25 percent tax bracket, you would save about $425,” said Fears. “Without the deduction, that’s $425 less.”
For the year 2015, 4.1 million people claimed the deduction for private mortgage insurance.
Homeowners might also be affected by the elimination of other deductions such as the mortgage interest deduction that was capped under the tax plan and the cap on the state and local income tax deductions.
The shrinking tax refunds could have a negative impact on the housing market. Data analysis compiled by Black Knight Financial Services found that many homeowners used their tax refunds to catch up on any delinquent mortgage payments.
“Looking at IRS filing statistics, we see that nearly one in five Americans file their returns within the first two weeks of tax season, and over 40 percent had completed their taxes by the first week in March,” Ben Graboske, data and analytics executive vice president at Black Knight, explained last year. “Unsurprisingly, incentive played a big role in this timing; not only were Americans who filed early more likely to receive a refund than those filing later, but they also received larger refunds on average. Likewise, mortgage cures — delinquent borrowers who bring themselves back to current status — correspondingly spike in February and March as well, suggesting that some portion of Americans are using their tax refunds to make past-due payments on their mortgages.”
According to Graboske, in recent years as many as 300,000 borrowers have made overdue payments on their mortgage loans.
Given the fate of some of these deductions and uncertainty around others, like the private mortgage interest deduction, first-time homebuyers might have to rethink their purchases and either buy a smaller home, delay their purchase or not purchase altogether. This could have a ripple effect on the housing market, according to Fears.
“Those first time buyers are purchasing the homes of trade-up buyers,” he pointed out. Trade-up buyers are those who are trying to sell their first home in order to buy a different one. “So if you weight down on the entry-level portion of the market you are going to weight down on the upper end of the market.”
One of the lawmakers who has been pushing to extend some of these temporary tax provisions, including the private mortgage insurance deduction is Senator Orrin Hatch. However, his effort to get these deduction included in the tax reform failed. The feeling among some has been that if the deductions didn’t make it into tax reform, they were not important enough and should just be left to die.
However, there might be some hope yet.
Most recently, Congressman Kevin Brady, the chairman of the Ways and Means Committee, said the final decision on these temporary tax extension has yet to be made.
“In a post-tax reform world, we really need a thorough review, especially of the 2018 provisions in tax extenders,” he said. “And so there are discussions but no agreement has been reached.”
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