In December 2017, President Trump signed the Tax Cuts and Jobs Act (TCJA), a tax overhaul that sought to cut corporate and individual income taxes and stimulate the economy. As part of the tax package, the standard deduction was increased across all tax brackets and rules for mortgage interest deductions changed.
If you’re one of the millions of Americans in the market for a new home in 2018, or interested in refinancing, this could impact you. Here’s how.
According to the Internal Revenue Service, the standard deduction is a dollar amount that reduces the amount of income on which you are taxed and varies according to your filing status. If you’re married and filing a joint income tax return your new standard deduction has nearly doubled to $24,000 from $12,700. For singles and married couples filing separately, it is $12,000 from $6,350. For heads of households, the deduction is $18,000 from $9,350.
This is important because in previous years, homeowners with mortgages of up to $1 million were able to itemize their mortgage interest, and if it, combined with any other itemizations, was above the standard deduction for their filing class, that’s the amount by which their taxable income was reduced. Now, if total itemized deductions don’t exceed the higher standard deduction, you’ll likely take the standard deduction and one of the major benefits of homeownership - deductible mortgage interest - has no tax impact.
Amount of mortgage debt eligible for interest deduction
Under previous tax laws, interest could be deducted on up to $1 million in mortgage debt. The new law has decreased that amount, specifying deductions can be made on mortgage debt of up to $750,000.
While existing mortgages of $1 million have been grandfathered in, any new mortgage larger than $750,000 can only deduct the interest up to that amount. This means if you’re considering buying a more expensive home, you won’t be able to deduct mortgage interest on the portion of the mortgage that is above $750,000.
Home equity loans and mortgage refinancing
Previously, the interest from home equity loans could be deducted, so long as it didn’t bring the total outstanding debt on the home above the allowable limit of $1 million. Now, the interest on such loans can still be deducted, but only if it’s used to build or improve the home, and the total mortgage debt stays below the new allowable limit of $750,000.
When looking to refinance a home, the amount refinanced must be in the same amount as the outstanding debt on the home for interest to be deducted. If more is borrowed, the outstanding amount will be considered a home equity loan and therefore not deductible, unless used to build or improve the primary home. So, for those who get second mortgages on their homes in order to finance other items, the interest payments on the amount above the outstanding debt from the first mortgage is no longer tax deductible.
Consult your tax professional for more details on these changes and planning advice.
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