A well-known aspect of the new Tax Cuts and Jobs Act is the doubling of the size of the standard deduction. However, this gift came at the expense of several of the most popular itemized deductions. One such being the Mortgage Tax Deduction.
The good news for people with existing mortgages prior to the end of 2017, is that they were grandfathered under the old rules, under which an individual can deduct interest on mortgages over a million dollars. They can also use a special rule for home equity loans where an individual can deduct interest on them up to $1.1 million. However, for new loans that overall limit for the first and second homes are limited to $750,000.
Previously, you could just reduce the amount of withholding that you would have from your paycheck because you would be using the amount to pay for the mortgage interest on your house. It wouldn’t be a big deal since the interest and property tax was deductible. However now that this will be reduced, people getting new mortgages will need to evaluate whether or not they should be reducing their work withholdings.
Another thing to consider is if you have a reason to take on debt and get a home equity loan. Previously this was a good way to self-fund businesses and like ventures; however now, you have to seriously examine the pros and cons of this form of debt since the interest may not be deductible.
There is some discussion as to whether if an individual has a home equity loan and uses it to improve their home, if the interest from that loan can still be deducted. However, only time will tell as the IRS is still interpreting what the law says on that. If the deduction is ruled to work in this situation, the deduction can be used up to $750,000.
For a vast majority of Americans these mortgage tax changes will not be that consequential since most will not be taking out a mortgage to purchase a million-dollar home, and not many will even reach the $750,000 threshold.
But for those that live in California and New York, where property values are exceptionally high, it will be especially frustrating since they would be more likely to be purchasing a home that is worth a million dollar or more depending on the area and these individuals would most likely be itemizing their returns..
It is worth noting that while the usage of this itemized deduction may be reduced, the usage of itemized deductions in general may decrease since the standard deduction for both single and married filing jointly taxpayers has been doubled (from $6,000-$12,000 and $12,000 to $24,000). This means that it will now be in the best interest of a majority of Americans to use the standard deduction.
For any other questions or concerns that you may have about the Tax Cuts and Jobs Act and how it will affect your tax bill, please contact us at GROCO today!