Can I Claim The Mortgage Interest Deduction?

Dated: March 5 2020

Views: 562

By: Leanne Potts

The mortgage interest deduction and other tax deductions for homeowners have fewer takers these days. Here’s what to know.

Like most homeowners last tax season, you may have discovered that you can no longer write off your property taxes or claim the mortgage interest deduction.

That doesn’t necessarily mean your taxes went up. The change is because the standard deduction doubled, negating many homeowners’ need to itemize their home-related expenses. Here’s a roundup of the rules affecting homeowners.

Standard Deduction

The standard deduction is the amount everyone gets to claim whether they have actual deductions or not. It skyrocketed after the tax law changes, and has gone up again, incrementally, for tax year 2019. It’s now $24,400 for married, joint-filing couples (up from $24,000 in tax year 2018). It’s $18,350 for heads of household (up from $18,000). And $12,200 for singles (up from $12,000).

Many more people now find the standard deduction is higher than their itemizable write-offs.

The proportion of homeowners who now find it advantageous to itemize their deductions (including mortgage interest and property taxes) under the new rules has fallen from about one in three to around one in 10. 

“This doesn’t necessarily mean that those who no longer itemize will pay more taxes,” says Evan Liddiard, a CPA and director of federal tax policy for the National Association of REALTORS® in Washington, D.C. “It just means that they’ll no longer get a tax incentive for buying or owning a home.”

So are you still itemizing, or are you now in standard deduction land? This calculator can give you an estimate.

If the answer is standard deduction, you’ll find that your tax forms are slightly simpler when you don’t itemize, says Liddiard. But the trade-off is that our tax system no longer gives most homeowners a tax advantage over those who rent. Find instructions for IRS Form 1040 here.

Personal Exemption

The increase in the standard deduction for homeowners and non-homeowners has a flip side: There’s no personal exemption. No longer can you exempt from your income $4,150 for each member of your household. And that might temper the benefit of a higher standard deduction, depending on your particular situation. 

For example, a single person might still come out ahead. Her $5,850 increase in the standard deduction is more than the $4,200 lost by the personal exemption repeal.  

But consider a family of four in the 22% tax bracket with two kids over 16. For tax year 2019, they no longer have personal exemptions totaling $16,800. The higher standard deduction is worth $2,574 more to them in their tax bracket ($11,700 x 22%). But the loss of the exemptions would cost them an extra $3,696  ($16,800 x 22%). So they lose $1,122 ($3,696 – $2,574).

However, if the two kids are under 16, the family gets additional child tax credits worth $2,000. That more than offsets the loss from losing the exemptions resulting in a $878 tax cut ($1,122 – $2,000).  However, those with older kids lose the exemption without an offsetting increase in the child credits.

The takeaway: Your household composition will probably affect whether you gained or lost under the new tax law.

Mortgage Interest Deduction

The tax law caps the mortgage interest you can write off at loan amounts of no more than $750,000. However, if your loan was in place by Dec. 14, 2017, the loan is grandfathered, and the old $1 million maximum amount still applies. Since most people don’t have a mortgage larger than $750,000, they won’t be affected by the limit.

But if you live in a pricey place (like San Francisco, where the median housing price is well over a million bucks), or you just have a seriously expensive house, federal tax laws may mean you’re not going to be able to write off interest paid on debt over the $750,000 cap.

State and Local Tax Deduction

The state and local taxes (SALT in CPA lingo) you pay — including income, sales, and property taxes — are itemizable write-offs. But. Tax rules say you can’t deduct more than $10,000 for all your state and local taxes combined, whether you’re single or married. (It’s $5,000 per person if you’re married but filing separately.)

The SALT cap is bad news for people in areas with high taxes. The majority of homeowners in around 20 states have been writing off more than $10,000 in SALT each year, so they’ll lose some of this deduction. “This is going to hurt people in high-tax areas like New York and California,” says Lisa Greene-Lewis, CPA and expert for TurboTax in California. Typical New Yorkers, for example, were taking SALT deductions around $22,000 a household.

Rental Property Deduction

If you’re a landlord, there are no limits on the amount of mortgage debt interest or state and local taxes you can write off for rental property. And you can write off operating expenses, like insurance, lawn care, and utilities on Schedule E.

Home Equity Loans

You can write off the interest on a home equity or second mortgage loan (if you itemize). But you may do so only if you used the proceeds to substantially better your home and only if the total, combined with your first mortgage, doesn’t go over the $750,000 cap ($1 million for loans in existence on Dec. 15, 2017). If you used the equity loan to pay medical expenses, take a cruise, or anything other than home improvements, that interest isn’t tax deductible.

Here’s a big FYI: If you took out an equity loan before the 2017 tax changes and used it to, say, pay your child’s college tuition, you have to stop writing off that interest. 

Mortgage Debt Forgiveness and Mortgage Insurance Premiums

Two deductions that went away at the end of 2017, have returned. At least through 2020.

If you sold your primary residence short and had part of your mortgage debt written off by the lender, you don’t have to pay tax on the amount forgiven.

Also back through tax year 2020 is the deduction for private mortgage insurance. Keep in mind, however, that it’s only relevant to itemizers making not more than $109,000 per year.

4 Tax Tips for Homeowners

If the mortgage interest deduction and others elude you, these strategies might help reduce your tax obligation.

1. Single people may get more tax benefits from buying a house, Liddiard says. “They can often reach [and potentially exceed] the standard deduction more quickly than can married couples. This is because a house for one is not half the price of a house for two.” You can check how much you’re likely to owe or get back under the new law on this tax calculator.

2. Student loan debt is deductible, up to $2,500 if you’re repaying, whether you itemize or not.

3. Charitable deductions and some medical expenses are itemizable. If you’re generous or have had a big year for medical bills, these, added to your mortgage interest and state and local taxes, may be enough to bump you over the standard deduction hump and into the write-off zone.

4. If your mortgage is over the $750,000 cappay it down faster so you don’t eat the non-deductible interest. You can add a little to the principal each month, or make a 13th payment each year.

Standard Deduction: Big Change

The standard deduction, that amount everyone gets, whether they have actual deductions or not, nearly doubled under the new law. It's now $24,000 for married, joint-filing couples (up from $13,000). It's $18,000 for heads of household (up from $9,550). And $12,000 for singles (up from $6,500).

Many more people will now get a better deal taking the standard than they would with their itemizable write-offs.

For perspective, the number of homeowners who will be able to deduct their mortgage interest under the new rules will fall from around 32 million to about 14 million, the federal government says. That's about a 56% drop.

"This doesn't necessarily mean they'll pay more taxes," says Evan Liddiard, a CPA and director of federal tax policy for the National Association of REALTORS® in Washington, D.C. "It just means that they'll no longer get a tax incentive for buying or owning a home."

So will you be able to itemize, or will you be in standard deduction land? This calculator can give you an estimate.

If the answer is standard deduction, you'll be pleased to know that tax forms are easier when you don't itemize, says Liddiard. Find instructions for IRS Form 1040 here.

Personal Exemption Repealed

One caveat to the increase in the standard deduction for homeowners and non-homeowners is that the personal exemption was repealed. No longer can you exempt from your income $4,150 for each member of your household. And that might temper the benefit of a higher standard deduction, depending on your particular situation. 

For example, a single person might still come out ahead. Her $5,500 increase in the standard deduction is more than the $4,150 lost by the personal exemption repeal.  

But consider a family of four with two kids over 16 in the 22% tax bracket. They no longer have personal exemptions totaling $16,600.  Although the increase in the standard deduction is worth $2,420 (11,000 x 22%), the loss of the exemptions would cost them an extra $3,652  (16,600 x 22%).  So they lose $1,232 (3,652 – 2,420).

But say their two kids are under 16, giving them a child credit worth $2,000. That offsets the loss resulting in a $758 tax cut.

The takeaway: Your household composition will probably affect your tax status.

Mortgage Interest Deduction: Incremental Change

The new law caps the mortgage interest you can write off at loan amounts of no more than $750,000. However, if your loan was in place by Dec. 14, 2017, the loan is grandfathered, and the old $1 million maximum amount still applies. Since most people don't have a mortgage larger than $750,000, they won't be affected by the cap.

But if you live in a pricey place (like San Francisco, where the median housing price is well over a million bucks), or you just have a seriously expensive house, the new federal tax laws mean you're not going to be able to write off interest paid on debt over the $750,000 cap.

State and Local Tax Deduction: Degree of Change Varies by Location

The state and local taxes you pay — like income, sales, and property taxes — are still itemizable write-offs. That's called the SALT deduction in CPA lingo. But. The tax changes for 2019 (that's tax year 2018) mean you can't deduct more than $10,000 for all your state and local taxes combined, whether you're single or married. (It's $5,000 per person if you're married but filing separately.)

The SALT cap is bad news for people in areas with high taxes. The majority of homeowners in around 20 states have been writing off more than $10,000 in SALT each year, so they'll lose some of this deduction. "This is going to hurt people in high-tax areas like New York and California," says Lisa Greene-Lewis, CPA and expert for TurboTax in California. New Yorkers, for example, were taking SALT deductions around $22,000 a household.

Rental Property Deduction: No Change

The news is happier if you're a landlord. There continue to be no limits on the amount of mortgage debt interest or state and local taxes you can write off on rental property. And you can keep writing off operating expenses like depreciation, insurance, lawn care, and utilities on Schedule E.

Home Equity Loans: Big Change

You can continue to write off the interest on a home equity or second mortgage loan (if you itemize), but only if you used the proceeds to substantially better your home and only if the total, combined with your first mortgage, doesn't go over the $750,000 cap ($1 million for loans in existence on Dec. 15, 2017). If you used the equity loan to pay medical expenses, take a cruise, or anything other than home improvements, that interest is no longer tax deductible.

Here's a big FYI: The new rules don't grandfather in old home equity loans if the proceeds were used for something other than substantial home improvement. If you took one out five years ago to, say, pay your child's college tuition, you have to stop writing off that interest. 

4 Tips for Navigating the New Tax Law

1. Single people may get more tax benefits from buying a house, Liddiard says. "They can often reach [and potentially exceed] the standard deduction more quickly." You can check how much you're likely to owe or get back under the new law on this tax calculator.

2. Student loan debt is deductible, up to $2,500 if you're repaying, whether you itemize or not.

3. Charitable deductions and some medical expenses remain itemizable. If you're generous or have had a big year for medical bills, these, added to your mortgage interest, may be enough to bump you over the standard deduction hump and into the write-off zone.

4. If your mortgage is over the $750,000 cappay it down faster so you don't eat the interest. You can add a little to the principal each month, or make a 13th payment each year.

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Tj Brar

Originally from Punjab India, in 2010 I made the Best decision to move to Pacific Northwest. Here I live in Lynden with the Mount Baker as my backdrop with my two daughters and a lovely wife. I enjoy ....

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