How tax bill will change consumers’ financial behavior


Whether to rent or buy a home, how to pay for college and where to stash retirement savings are all questions that hinge in large part on the tax code. Earlier this fall, it appeared that the tax bill winding its way through Congress might dramatically reshape consumers’ incentives.

But lobbyists fought hard to preserve a slew of existing tax breaks related to consumer borrowing and saving, and the changes that made it into the final version of the legislation are relatively small.

“I would say probably the biggest news here is what didn’t happen,” said David Musto, president of the investment advisory firm Ascensus.

For example, the bill retains the existing tax deduction for student loan interest, which would have been axed under an earlier version passed by the House. It also keeps the current limits for pre-tax contributions to retirement accounts, rather than reducing them, as was being contemplated earlier this year.

President Trump celebrates passage of tax reform bill with Vice President Mike Pence, Mitch McConnell, Tim Scott and Paul Ryan

“I would say probably the biggest news here is what didn’t happen,” said one analyst. The original version of the bill would have had more far reaching effects than the one passed by Congress and praised by President Trump.

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Still, the largest rewrite of the U.S. tax code in decades includes significant tweaks to the treatment of personal debt and savings. Those changes will most directly impact consumers, but since the new tax incentives will shape households’ financial decision-making, banks will also feel the effects.

The U.S. personal savings rate was just 3.2% in September, its lowest level since late 2007. One important question now is whether Americans will save or spend the money that they pocket as a result of the legislative changes. Most households are expected to see a smaller tax bill, at least initially.

Below is a more detailed look at how the legislation is likely to impact the decisions Americans make regarding how to finance their homes, education and retirement.

Mortgage finance

As has been widely reported, the tax bill reduces the cap on mortgage interest that can be deducted from $1 million to $750,000. That change is smaller than the House had proposed. Still, it is expected to hurt some homebuyers in states that have high housing costs, such as New York and California.

“I think the marginal homebuyer in many of these expensive states is going to see a significant increase in the cost of owning residential real estate,” said Tendayi Kapfidze, chief economist at LendingTree.

Analysts expect the smaller mortgage interest deduction to weigh on home prices, though the impact will be offset partially by an increase in the size of the standard deduction, which will reduce the number of homeowners who itemize their deductions.

“At the national level we expect a negative impact of 1% on home prices from these changes,” analysts at JPMorgan Chase wrote in a research note.

In a less publicized change, the tax bill also eliminates the deductibility of interest on home equity loans and home equity lines of credit.

Such loans are frequently used by consumers who are in a financial pinch and want consolidate other debts. Many of those borrowers lack access to other forms of attractively priced credit, so they are unlikely to be dissuaded from tapping into their home equity. If they itemize their tax deductions, they will end up paying more.


The existing deduction for student loan interest helps many young adults who are struggling to pay off the high cost of college tuition.

Student loan payments are often cited as an important reason why many millennials are not buying homes, and if this deduction had been eliminated, it would have made purchasing a house even more difficult.

One change that the tax bill did make involves 529 accounts, which have long enabled parents to set aside tax-advantaged funds to pay for their kids’ college education.

The bill that Congress passed this week will allow for withdrawals of up to $10,000 annually for each beneficiary to pay for tuition at elementary and secondary schools.

That change will help many wealthier families that can afford the cost of private and parochial schools. It could also change the calculus for some households that are on the fence about whether to send their kids to public or private schools.


The bill does not reduce the contribution limits for 401(k) plans, as GOP lawmakers contemplated earlier this year. Nor does it eliminate the ability of workers to make pre-tax contributions to their employer-linked retirement plans, another idea that had been floated.

“Those are very positive news from a savings standpoint,” said Maria Bruno, senior investment strategist at Vanguard Group.

The bill makes some smaller changes to the rules that govern retirement plans, though.

The rate at which the contribution limits for those plans increase will be slowed down. In addition, consumers who take out loans against their 401(k)s and then leave their jobs will have a longer period of time in which to make repayments without suffering tax consequences.

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