What the New Tax Law Means for the Home Equity Loan Interest Deduction

Prior to the recent tax law changes, taxpayers were allowed to deduct qualifying mortgage interest on loans up to $1 million, plus the interest on an additional $100,000 in home equity debt. The new tax law clearly limits the mortgage interest deduction to $750,000 worth of debt; however, treatment of home equity loan debt was more ambiguous. Many read the new law as eliminating the interest deduction altogether on home equity loans and lines of credit. Other tax professionals argue that the use of the loan proceeds is what matters.

Confusion Sets In 

The confusion stems from language in the new tax law that erased the deduction for home equity debt interest between tax years 2018 and 2026, unless they use the debt to buy, build or improve the home. The debt also must be collateralized by the underlying home. In response to the ambiguity, the Internal Revenue Service recently issued guidance on how to handle deducting interest paid on home equity debt under the new tax law. The IRS clarifies that taxpayers can still deduct interest on home equity loans, lines of credit or second mortgages, regardless of the technical loan label or name, and that it is the use of the loan proceeds that matters.

Going into more detail on the new law, the IRS notes that taxpayers can deduct interest from refinanced debt if it meets all three of the following criteria:

  • The debt is secured by a qualified residence
  • The total of the refinanced debt is not greater than the cost of the residence
  • The proceeds are used to improve or expand the residence

All of this is subject to the new $750,000 (married filing jointly) debt limit on the total amount of all loans.

Examples, Please!

To help further clarify, let’s take a look at a few examples of the IRS guidance in action.

Example 1: On Feb. 3, 2019, Zach and Linda get a mortgage for $600,000 to purchase their primary residence with a value of $850,000. In March of the same year, the taxpayers obtain a home equity loan for $150,000 to add on to the house.

The primary residence secures both loans and the combined total of the loans is $750,000, so it neither exceeds the $750,000 mortgage loan limit nor does the cost of the home exceed the debt, so all interest paid on both loans is deductible.

Example 2: On March 14, 2020, John and Marcy take out a mortgage of $400,000 to buy a primary residence (loan secured by the property). In June of the same year, they buy a cabin in the woods as a vacation home and take out a loan for $200,000 to acquire it (loan is secured by the cabin).

Since the total of the two mortgages is $500,000 (below $750,000) and secured by the individual properties, all related interest is deductible. Note that if the $200,000 used to buy the cabin was taken as a home equity loan or line of credit against their main residence, then the interest paid on the $200,000 would NOT be deductible since it was not used to improve or add-on to the same property.

Example 3: On July 7, 2018, Bob and Stacy get a mortgage for $550,000 to acquire a house as their primary residence (loan is secured by the home). Later in October, they take out another $400,000 loan to buy a lake house as a vacation property (loan is secured by the lake house).

Despite the loans being secured by the individual properties, not all of the interest is deductible because the total of the two mortgages at $950,000, exceeding the $750,000 limit. Instead, only a percentage of the total interested paid is deductible.

Conclusion

As you can see, generally interest on home equity loans, lines of credit and refinances are still deductible as long as you reinvest in or add on to a qualified residence (within the debt limits). If you use one of these types of loans for something unrelated, such as paying credit card debt, taking a vacation or putting your kids through college, it’s not deductible—no matter what you call the loan.

Trade Wars on the Horizon? What This Could Mean for Financial Markets

The Trump administration’s recent flurry of trade moves is spiking uncertainty and confusion among financial markets. The imposition of tariffs on steel and aluminum as well as levies on Chinese imports have provoked immediate reactions. China, for example, claims that the United States’ actions are a violation of international trade rules and has threatened to take actions to defend its national interests.

While Trump administration officials view the ensuing chaos caused by America-first trade moves as a necessary price of doing business in a global economy, other politicians, pundits and the financial markets appear concerned that a trade war is being provoked.

The financial markets are reacting negatively to this news because history shows that trade wars rarely end well for the stock market. Earnings and valuations for companies that are not linked to international trade will most likely not be impacted. The problem, however, is that concerns over a trade war can shift overall stock market sentiment, putting everything at risk.

The Impact So Far

Within 24 hours of President Trump’s announcement of the tariffs and levy, stocks across the globe declined over fears of escalating trade tensions. The accompanying table illustrates the impact on worldwide markets.

Impact on Market Performance

Country/Region Index Day Week Year
US S&P 500 -2.5% -3.9% -1.1%
UK FTSE 100 -0.8% -3.7% -10.3%
Eurozone Stoxx Europe 600 -1.3% -3.5% -6.3%
Hong Kong Hang Seng -2.5% -3.8% 1.3%
China Shanghai -3.4% -3.6% -4.7%
Japan Nikkei 225 -4.5% -4.9% -9.4%

 

Source: DataStream, March 23, 2018. Past performance is not a foolproof indicator of  future performance; trends may not be repeated.

Asian markets suffered the most, primarily over concerns that Japan could get caught up in a United States versus China trade war. This is coupled with the fact that the Japanese yen is considered by many to be a safe haven and will rise in any flight to safety. When the value of the yen rises, Japanese exports become more expensive.

Europe and the United Kingdom were the least scathed. In addition, a subsequent announcement indicated that the EU, Mexico and Canada will be temporarily exempt from the new steel and aluminum tariffs.

Bond Market Reaction

Yields on government bonds—including 10-year U.S. Treasuries—declined, which caused prices to rise. The yield spread widened on the corporate bond market as the difference in yields versus equivalent government bonds increased.

What’s Driving the Market Reaction?

China retaliated to news of U.S. tariffs by unveiling plans to charge tariffs of their own on more than 100 U.S. products, raising concerns of a full-scale trade war. Trade-war fears are causing investors to worry about the impact on corporate earnings, especially within cyclical sectors. These concerns follow on the heels of a period of rising growth and a positive future outlook, as in January when the International Monetary Fund upgraded its forecast for global growth by 2 percent. The IMF now projects up to 3.9 percent growth in both 2018 and 2019.

What Will China Do Next?

The Chinese Ministry of Commerce plans to increase or add tariffs to 128 U.S. products, which represents an approximate $3 billion economic impact. At the same time, China’s U.S. ambassador noted that his country is not interested in starting a trade war, reiterating that the Chinese believe in free trade. Some believe this is China’s way of indicating a willingness to engage in negotiations.

Furthermore, China could potentially entreat the World Trade Organization (WTO) to open a case against the United States or limit the procurement of services provided by U.S. firms to state-owned and government entities.

Potential Market Impact of a Full-Blown Trade War?

If history is any guide, we know that trade wars are not good for markets. Many historians believe, for example, that the Great Depression of the 1930s was either deepened or lengthened by protectionist policies.

More recently, in 2002 President George W. Bush announced steel tariffs of up to 30 percent (exempting Mexico and Canada). The European Union threatened but never enacted retaliatory measures; however, they did open a case with the WTO. In December 2003, the WTO ruled against the United States, causing the U.S. to drop the tariffs. The impact on the U.S. dollar and markets was negative but muted, due to the short duration and quick resolution of the matter.

Overall, the main concern of investors is on the potential for a long and protracted trade war with China that could drag in the rest of the world. This would cause a global slowdown, impacting earnings and growth and creating a downward cycle that forces the markets lower.

How to Manage Remote Employees

According to a report from FlexJobs and Global Workplace Analytics, the number of remote workers has increased since 2005. “The 2017 State of Telecommuting in the U.S. Employee Workforce Report” found that 3.9 million workers now perform at least 50 percent of their working hours by telecommuting from their residence. This increase in remote workers is more than twice the 2005 level of 1.8 million telecommuters. With telecommuting increasing as a way of work, there are some considerations when it comes to those doing it on an exclusive basis.

Retaining, Managing and Motivating Remote Workers

The more spread out employees are across time zones within an organization, the greater the chance of inconveniences in scheduling. If one employee is in Australia and additional employees are in different regions of the United States and Canada, the time differences can create a challenge.

This scheduling problem is more pronounced for office-based employees who may have regular hours, such as 9 a.m. to 5 p.m. In these cases, it’s up to the managers to schedule meetings and control workloads with remote workers who might have more flexible work schedules due to arrangements for their personal lives.

Employees who are on paternity or maternity leave or are caring for an elderly parent are prime candidates for working remotely. Employees who function more productively in the early morning hours or later into the evening also benefit from a remote work arrangement.

While misconceptions exist that remote workers are not be as productive as their office counterparts, a recent study indicates the opposite—requiring a different kind of work monitoring. According to a 2013 Gallup State of the American Workplace report, remote employees work about four hours more per week compared to employees working in an office. While this amount may not lead to burnout for most employees,for those who work excessively, it can develop.

Along with reminding and encouraging employees to take their earned paid time off, a company can temporarily turn off email servers or monitor remotely accessed software usage to help remind telecommuters to pursue a better work-life balance.

Ensuring All Perspectives are Gathered

Unlike a traditional office where people can be found easily, remote workers might be mistaken as absent because they’re rarely or never at the office. Taking steps to include technology to see and speak with everyone ensures remote workers are only a click away. Managers and supervisors should take the lead in ensuring that everyone is aware of the option to videoconference—and that employees are trained on how to use it. Much like someone in the office can stop by for a quick question or to attend a lengthy meeting, office workers should have the same option to communicate with their remote colleagues.

Additionally, managers should take steps to evaluate all employees fairly, including remote workers, when it comes to performance evaluations. According to the MIT Sloan Management Review, remote workers often are overlooked by supervisors due to passive face time. “Passive face time” refers to simply being observed as present at work—not speaking with or collaborating with colleagues or supervisors. The authors noted that remote employees receive poorer periodic reviews, smaller pay increases and are promoted less often—even when their performance and hours worked are on par with in-office colleagues.

While remote employees can be just as effective as those who work in an office setting, employers should make functional modifications to ensure telecommuters are just as involved in collaborative work as those inside the office.

Sources Used

https://www.flexjobs.com/2017-State-of-Telecommuting-US/

http://webcache.googleusercontent.com/search?q=cache:mzuF7bmziU4J:www.gallup.com/file/services/176708/State%2520of%2520the%2520American%2520Workplace%2520Report%25202013.pdf+&cd=2&hl=en&ct=clnk&gl=us

https://sloanreview.mit.edu/article/why-showing-your-face-at-work-matters/