American Tax Service

Helping Americans File Their Taxes

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Is it Possible to Deduct Mortgage Interest?

The Tax Cuts and Jobs Act (TCJA) completely changed the US tax system. The last such change of this magnitude happened more than thirty years ago. Millions of Americans are now left wondering what they’re entitled to and which deductions are still valid.

One of the most widely taken deductions is the deduction for mortgage interest. The TCJA didn’t eliminate it, but major changes were made. Plus, as a result of other changes, many Americans will now be ineligible to use the mortgage interest deduction going forward.

Here’s what you need to know about this popular deduction.

How the Mortgage Interest Tax Deduction Has Changed

mortgage interest

The TCJA maintained most of the popular tax deductions. But they have been left with modifications. Sadly, the modifications are negative for most taxpayers.

From 2018 onwards, the principal limit in which interest can be deducted has been reduced from $1,000,000 to $750,000.  For married taxpayers that are filing a separate return, this limit is now $375,000, down from $500,000.

But if you had a loan from 2017 or before, the old limits will continue to apply for you.

So, in terms of the mortgage deduction, it only applies to your primary residence or a second home. It doesn’t apply to investment property. Furthermore, the loan value and the interest deducted can’t be worth more than the initial cost of the home.

And these changes are set to expire following the 2025 tax year. The future after that is unknown.

Deductions for Home Equity Loan Interest After 2018

The most notable change is that Americans are no longer able to deduct interest on home equity debt up to $100,000. Many Americans panicked and believed that they couldn’t deduct any home equity loan interest, but this couldn’t be further from the truth.

Whether you can deduct or not depends on what you used your home equity loan for. If you used it to improve your home, you can still deduct the interest. Where you can’t deduct the interest is if you used the loan to cover any other personal expenses.

The reason why is because if you still used the home equity loan to improve your home it technically counts as a qualified residence loan under IRS guidelines. Technically, this deduction doesn’t exist, but because it still qualifies under qualified residence loan standards you can still take advantage of it.

Can You Continue to Deduct Mortgage Insurance?

Did you have less than a 20% deposit when you bought your home? Then the chances are you have private mortgage insurance.

The private mortgage insurance deduction has consistently been extended by Congress

Although as of February 2018, it wasn’t extended, however, It’s often extended retroactively, so make sure you keep an eye on this.

Essentially, with this deduction, you can deduct your premiums as interest, in terms of tax.

So, let’s say that you paid $10,000 in mortgage interest. And let’s say you also paid $2,000 in mortgage insurance premiums. Your total deductible mortgage interest is $12,000 on your next tax return. That assumes the private mortgage insurance deduction continues to be extended.

Fewer Homeowners Can Take the Mortgage Interest Deduction

The bad news is that the mortgage interest deduction remains an itemized deduction. So, in order to use it you need to make sure that the standard deduction isn’t worth more than itemized deductions.

The problem is that the TCJA also doubled the standard deduction, so it’s no longer a no brainer as to which option you will decide to choose.

Let’s look at the sort of difference this has made:

In 2017, the standard deduction for a married couple filing jointly was $12,700. If they paid $15,000 in mortgage interest, donated $3,000 to charity, and paid $3,000 in state and local taxes itemizing would have given them an extra $11,300.

But after 2018, these same numbers would mean that they should take the standard deduction because it’s now worth $24,000.

On average, 30% of American taxpayers itemize their deductions. It’s expected that this will drop to 5%, due to these changes. So now a quarter of American taxpayers will no longer be able to itemize or take the deductions they have for many years.

So, what’s the last word on this?

You can still claim the mortgage interest deduction, but due to the lowering of limits and the changing of the criteria it will be rarely worth it for most Americans. The standard deduction is now something most taxpayers will take because it’s not worth itemizing any longer.