I’ve been waiting almost three full years to get me some of that “inflation reduction” from the “Inflation Reduction Act,” which was signed into law in August 2022.
And now I fear that I may have to wait even longer to get me some of that “Beautiful” from the One Big Beautiful Bill Act.
Both laws remind us of two things: (1) Congress has an amazing ability to give misleading names to bills; and (2) both laws prove that pork barrel spending reigns supreme over fiscal responsibility.
Thing #1: The Bill Makes Homebuying A Necessity.
Renowned analyst Lyn Alden repeats over and over that “there is no stopping this train,” alluding to Congress’ inability to stem spending and prevent a fiscal meltdown and the monetization of our debt (inflation). Her reminder is to own hard assets, gold and Bitcoin, as a hedge against the inevitable inflation. For younger couples – owning a home is one of the best inflation hedges there is.
Thing #2: Private Mortgage Insurance (PMI) Is Tax Deductible.
Borrowers paying PMI can deduct those payments for income tax purposes. Woohoo, right? Not really. The income limit for deductibility is around $109,000 for a couple, and most of our clients make more than that. We love PMI now because it is so cost effective, as I explained in this blog – Why We Love PMI – but we never tout tax deductibility because so many borrowers exceed the income limits.
Thing #3: Permanent $750,000 Cap On Mortgage Interest Deduction.
Borrowers will forever be allowed to deduct the interest against mortgage debt up to $750,000. This is a good thing, but there is little doubt this would be enacted given the clout of the real estate lobby.
Thing #4: Large Standard Deduction Minimizes Tax Benefits.
This is not related to the bill per se, but it is an important reminder. “Standard deductions” of $15,000 for single filers and $30,000 for couples are now so large that the tax deductibility of mortgage interest often offers little benefit to borrowers in low-cost areas. Remember, it is only worth “itemizing” deductions like mortgage interest, property taxes, state taxes, and charitable giving if the total of those items exceeds the standard deduction amount.
This is also a reminder that the tax benefits of buying a home are less impactful nowadays, as the standard deduction is now so large. So, even if it is worth itemizing, the net benefits from buying a home are much lower now because homeowners only see benefits from the amount of deductions over and above the standard deduction. This is why we no longer loudly tout the tax benefits from buying a home like we did in the olden days.
Thing #5: State And Local Tax (SALT) Deduction Increased.
Taxpayers can deduct the property and income taxes they pay in their states from their income for federal tax purposes. This was previously capped at $10,000, but now it is capped at $40,000. This is a nice benefit for our CA buyers, but at the expense of our TX, FL, and TN buyers who are effectively subsidizing them.
Thing #6: Debt Ceiling Increased by $5 Trillion.
Remember how every year, one party was always threatening to shut down the government by refusing to allow the government to borrow enough to keep the government running? Well, we don’t have to endure that charade for a while, as the “debt ceiling” was increased by $5 trillion. See “Thing #1” – “There is no stopping this train…”
Thing #7: Poly Markets Believe A Recession Was Thwarted.
This is what interested me the most. The Poly Markets (betting markets) believed there was a 66% chance of a recession prior to the bill being passed, but they dropped that to 20% after the bill passed. This is primarily because of the extension of the tax cuts – which is a reminder that the “wisdom of crowds” believes that large tax increases are recessionary.
*This blog is for informational purposes only and should not be considered tax advice. We always recommend checking with a qualified tax professional for guidance on your specific situation.
