Can You Deduct Mortgage Interest If You Don't Itemize Deductions?

What a difference a year makes. While it always was necessary to itemize deductions on your tax returns to deduct mortgage interest, many homeowners no longer will have a need to do so. In December 2017, Congress passed the Tax Cuts and Jobs Act of 2017, which was signed into law by President Donald J. Trump. The new law changes the landscape when it comes to mortgage deductibility.

Standard Deductions

Because the standard deduction has been raised to $12,000 for single filers and $24,000 for married couples filing jointly, the number of taxpayers expected to use the mortgage interest deduction is anticipated to drop by 57 percent, according to CNBC. In 2017, approximately 46.5 million taxpayers used the mortgage deduction; only 18 million are estimated to do so in 2018. Unless the taxpayer has another large deduction, there will be no need for many Americans to itemize.

2017 vs. 2018 and the Long-Term

For those who continue to itemize deductions for a mortgage, there’s a new cap involved. In 2017, homeowners could deduct the interest on up to $1 million in mortgage loans. For 2018, the limit is $750,000, but this limit only affects those who take out a mortgage after Dec. 14, 2017.

Depending on the value of their homes, location and income level, some homeowners may see considerable losses when it comes to deductibility over the life of the typical 30-year mortgage. For example, a couple earning $83,100 and owning a home valued at $332,400 in Richmond, Virginia, will lose $5,000 in tax deductions over the life of a 30-year mortgage under the new tax plan. In 2017, they could have deducted $800 from their federal tax bill if they itemized for the mortgage deduction. In 2018, there is no deduction available. Homeowners in Minneapolis will fare even worse. A married couple filing jointly living there with an income of $87,000 and a house worth $347,800 would have seen a $1,400 deduction if itemizing in 2017. For 2018, they will not see any deduction, and that lack will cost them $15,000 over the life of a 30-year loan, or $500 annually. A married couple in Hartford, Connecticut, with a similar income and similarly valued home will lose a total of $24,000 over the life of their loan, or $800 annually.

That’s just for average income earners with relatively modest homes. High-income earners with more expensive properties will take a greater hit over time. In San Francisco, one of the country’s most expensive areas, a married couple filing jointly earning $285,200 a year and owning a home valued at $1.14 million could have deducted $13,300 in 2017. They can still deduct $5,300 in 2018 if they itemize, but the difference over the life of a 30-year loan is a whopping $145,000, or $4,833 annually.

Property Tax Caps

Formerly, state and local property taxes were fully deductible. The new tax law caps such deductions at $10,000. Those most affected live in states with higher property taxes, predominantly in the Northeast and California. Many of these homeowners may find themselves owing more in taxes overall under the new bill than those in other states. Business Insider reports that homeowners in 15 states will receive at least $100 less in deductions under the new tax law than under the previous regulations.

HELOC Interest Deductions

Under the new tax law, deductions for interest paid on home equity lines of credit, or HELOCS, are suspended until 2026. The same holds true for lines of credit, but there are exceptions. Previously, you could deduct HELOC interest for a loan used for any purpose, such as funding a child’s education or purchasing a new car. Now, only those loans used to “buy, build or substantially improve the taxpayer’s home” are deductible, according to the IRS.

Tip

  • In addition to your primary residence, you can deduct mortgage interest expense for a vacation home. The amount allowed is dependent on the vacation home's usage and mortgage size. You can also deduct mortgage interest expense for rental property on Schedule C.

Warning

  • As with all tax-related documentation, save all supporting material for seven years. Seven years is the amount of time the IRS can go back to conduct an audit when no fraud has occurred.

Photo Credits

  • Jupiterimages/liquidlibrary/Getty Images

About the Author

A graduate of New York University, Jane Meggitt's work has appeared in dozens of publications, including PocketSense, Financial Advisor, Sapling, nj.com and The Nest.


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