Homeowners in expensive US cities should be some of the first to notice how Trump's tax reform affects this year's filing

• The Tax Cuts & Jobs Act, which was passed in 2017, made some changes to the tax code that tax-paying homeowners will notice for the first time this year. 
• For one thing, a higher standard deduction means fewer homeowners will benefit from itemizing their 2018 taxes. Some will be unable to itemize and deduct their mortgage interest on their tax return like they may be used to doing.
• Homeowners in high cost of living areas may feel the impact of these changes the most due to the increased standard deduction and new limits on deductions for SALT taxes.

Tax reform passed in 2017 brought a whole host of changes that may alter the way people file their taxes this year.

Especially homeowners.

To start with, homeowners will probably be some of the first filers to notice the change to the standard deduction.  While the standard deduction was $6,350 for single filers and $12,700 for couples filing jointly until 2017, it is now $12,000 for single filers and $24,000 for married couples filing a joint tax return.

Taxpayers can either take the standard deduction, the set amount for all taxpayers of the same filing status, or they can add up "itemized" deductions (think mortgage interest, student loan interest, property taxes, and charitable contributions) and use that number instead.

"Many homeowners have been accustomed to taking solace in the fact that their mortgage interest and property tax bills were deductible," said Logan Allec, CPA and founder of Money Done Right.

But with changes to the tax code, that might no longer be the case.

How tax reform reduced the tax benefits of a mortgage

When deciding whether to take the standard deduction or to itemize, taxpayers choose the higher of the two amounts for obvious reasons. With a much higher standard deduction available, however, the nonpartisan Tax Policy Center believes a significantly smaller portion of Americans will have deductions sufficient to reach the threshold required to itemize. Largely, the change here may be psychological rather than mathematical: People used to deducting their mortgage interest - perhaps even those who used tax benefits as a reason to choose buying a home over renting - won't be able to proceed as usual.

In addition to enacting dramatic changes to standard deduction amounts, the Tax Cuts & Jobs Act reduced the principal balance limitation for the mortgage interest deduction from $1 million ($500,000 for married filers filing separately) to $750,000 ($375,000 for married filers filing separately), notes Allec. That means, for instance, that a taxpayer with a $1 million mortgage can now only deduct the interest paid on the first $750,000 of their mortgage, instead of for the full balance.  

However, this change only applies to mortgages taken out on or after December 14, 2017. Mortgages taken out prior to this date are subject to the former $1 million limitation rather than the new $750,000 limitation.

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Allec says another change the Tax Cuts & Jobs Act implemented was the elimination of the separate home equity line of credit (HELOC) deduction. Where taxpayers were once able to deduct the interest on a home equity line of credit with principal balance up to $100,000 regardless of how they used the proceeds, a HELOC principal balance now counts toward the $750,000 limitation described previously, just like the original mortgage. After tax reform, a homeowner can only deduct interest from their HELOC or home equity loan if they use the proceeds to make substantial improvements to their property.

For the most part, these changes mean almost nothing to individuals who didn't itemize anyway or have small mortgage balances that don't exceed the new limits. People holding large loans, however, might notice the change.

The change in SALT deductions could affect whole housing markets

Louisiana CPA Riley Adams of Young and the Invested says he believes several tax reform measures could slow down booming housing markets in places like San Francisco, Los Angeles, San Diego, and Seattle.

Riley says he has seen evidence that home price increases have already slowed considerably and even forced more supply onto the markets there. "As people reconcile the heightened cost of home ownership from a tax perspective, I suspect home price increases will continue to abate," he said.

In addition to the doubling of the standard deduction, Riley points to the change in treatment of state and local taxes commonly known as "SALT taxes" for some of these patterns. Under previous tax law, there was no limit on the amount of SALT taxes you could deduct against your federal income. In high cost of living areas, this allowed consumers to shoulder the cost burden of high property, income, and sales taxes more easily.

However, the new tax law caps the amount of eligible SALT taxes to claim against your federal taxable income at $10,000 per year, said Riley.

"I think at a very basic level, homeowners in high-tax, high-property value states will likely feel like they were dealt a bad hand by the Tax Cuts & Jobs Act because many of them will have lost a large itemized deduction," said Allec.

However, homeownership costs are just one piece of the puzzle. "It all depends on their individual tax situation," Allec said.