Is it Possible to Get a Tax Deduction on Your Home Equity Loan?

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Can I Get a Home Equity Loan Tax Deduction?Can I get a home equity loan tax deduction?

The answer is you can still deduct home equity loan interest. But the rules have changed, and there are more limitations than ever before.

Interest on home equity loans has traditionally been fully tax-deductible.

But with the tax reform brought on by President Trump’s Tax Cuts and Jobs Act (TCJA), a lot of homeowners are struggling to work out whether they can still claim a home equity loan tax deduction.

This is now the first year the new rules will apply to their new taxes, despite the original act being passed in 2017.

The new law states that you can deduct interest related to your mortgage up to a limit of $750,000 on qualified loans for married couples who decide to file jointly. For individual filers, this limit is set at $375,000.

These new limitations apply up to the 2025 tax year.

The deduction applies to interest paid on home equity loans, mortgages, mortgage refinancing, and home equity lines of credit.

Suppose you took on the debt before December 15th. 2017.  In that case, the home equity loan deduction could be taken on up to a million dollars worth of qualified loans for married couples filing jointly and half that amount for single filers.

New Limitations on Loans

Another alteration to the law that homeowners need to consider is that you can only deduct interest on loans used to purchase a home, build a home, or perform major renovations to an existing home.

Before this law came into force, you could deduct interest on loans used for non-property expenses, such as debt consolidation or purchasing other assets.

Now you can only make deductions on purchases that are used for your home.

Deducting Interest on Home Renovation Loans

Homeowners who take out home renovation loans also need to be aware of changes. The IRS now stipulates that you can only take the deduction when making ‘substantial renovations.

What this means is that if you’re making cosmetic upgrades to your home, you may no longer qualify for the deduction.

Repairs designed to maintain the property’s condition, such as painting the outside of the house, no longer qualify.

Is it the Right Move to Deduct Interest on a Home Equity Loan?

It depends on your personal circumstances.

The standard deduction has changed to $12,000 for single filers, $24,000 for married couples filing jointly, and $18,000 for heads of household. In addition, senior citizens and the blind can take additional standard deductions, depending on their current marital status.

In many cases, the standard deduction will provide a larger tax deduction than itemizing things like home equity loan interest.

Another influencing factor could be the exemptions set out for the AMT, otherwise known as the Alternative Minimum Tax. This applies mainly to high-income taxpayers so that they’re not using various tax credits to avoid paying their fair share of tax.

If you qualify, you must file a regular return and a special AMT return. Whatever amount is higher is the amount paid.

The TCJA ensured that fewer people would pay the AMT. The new exemptions are as follows:

  • $109,400 for married couples filing jointly.
  • $54,700 for married couples filing separately.
  • $70,300 for other tax filing statuses.

These are significant increases on what the limits were before.

If you don’t have to pay the AMT, you can still deduct mortgage interest. But you can’t deduct home equity interest. So high-income taxpayers will find less benefit in opting to itemize their interest payments on home equity loans.

What You Need to Know if Deducting Home Equity Loan, Home Equity Lines of Credit, or Second Mortgage Interest

You can only deduct interest payments on principal loans of up to $750,000 if married but filing jointly and $375,000 if you’re filing independently if you bought a home after December 15th, 2017.

You can continue to deduct based on the limits in place before the TCJA if you purchased a property before that date.

To figure out how much you can deduct, you should add up the total loan amounts on the different loans outlined above. If it doesn’t go above the described limits, you can deduct the total amount of interest. If the figure does exceed this limit, you can only deduct a portion of this interest.

Loans that qualify are those secured against a first or second home. Anything else doesn’t count.

You must use the loan to perform substantial renovations. Any loans taken out before the TCJA must still follow the current qualification rules. So, if you deduct interest on loans used to pay for things like tuition or medical expenses in the past, you can’t take that same deduction this year, so be prepared for that.

Proving What You Spent the Money On

Keep receipts and records for everything. For example, if you get audited, you’ll need to prove that the deductions were valid.

The deductions could be reversed if you can’t prove your expenses.

Deducting Home Equity Interest

You should receive Form 1098 by the last day of January. Your lender will supply this form to show how much interest you paid in the previous year.

If your loan is near the allowed limit, things get more complex, and you should consult IRS Publication 936.

Other Tax Breaks You Can Take

Mortgage Interest

You can deduct the interest on loans used to purchase your house, along with a refinanced mortgage. If you have a refinanced mortgage, interest can be deducted up to the property’s total purchase.

Points

Did you use points to pay for your mortgage in order to pay a lower interest rate in the long term? Then you can take a tax deduction for points. This deduction can be taken for the year you bought the house or across the total lifespan of the loan.

Property Taxes

Taxpayers who decide to itemize can deduct up to $10,000 for local and state property taxes.

This isn’t a lot because the TCJA restricted itemized deductions for property taxes paid to the state or your local municipality to $10,000 for married couples filing jointly and $5,000 for individual taxpayers.

Previously, you could deduct 100% of all property taxes paid.

Capital Gains Taxes

You can keep a portion of the capital gains without paying taxes whenever you sell your personal residence. For married couples filing jointly, this amount is set at $500,000 and $250,000 for individual taxpayers.

What You Should Expect When Filing Taxes

The standard deduction will have risen slightly by the time you file your taxes. The standard deduction will be $24,400 for married couples filing jointly and $12,200 for taxpayers filing as individuals.

The AMT exemption will be $71,700 for individuals, with a gradual phaseout at $510,300. Married couples filing jointly will see their exemption raised to $111,700, with a phaseout limit of $1,020,600.

There will also be other changes for taxpayers.

For example, the maximum credit for expenses relating to adoption will be raised to $14,080. Also, taxpayers not enrolling in a health insurance program won’t have to pay a penalty for not doing so.

Make sure you stay alert as to any tax changes because 2019 will be a landmark year. Many of the provisions set out by the TCJA will be coming into effect for the first time this coming tax filing season.

Think About Using Online Tax Preparation and Filing

Tax can be confusing. It can be complicated, and you need to know that you’re taking every deduction you can. For this reason, you should consider using online tax preparation.

The online software will help you claim the home equity tax credits and deductions you’re eligible for. They’ll also be able to help you decide whether you should itemize your deductions or take the standard deduction.