30 Jan Can You Write-Off Mortgage Interest on Your Taxes in 2018?
About two-thirds of American homeowners have some sort of debt on their homes, usually in the form of a mortgage or home equity loan, and it’s no wonder. As the Federal Reserve has pumped trillions into keeping interest rates low since the Great Recession, it has become easier and easier for homeowners to manage the payments on that debt. Then, when you add to that the tax-deductibility of nearly all home-related debt, the argument against paying off your mortgage gets even stronger, especially when considered in light of the “opportunity cost” of missing out on a raging bull market in stocks over the last nine years.
Now, however, it seems the times they are a-changin’.
With the passing of last year’s Tax Cuts and Jobs Act, effective beginning in 2018, the deductibility of mortgage and home equity debt has been reduced, but perhaps not in the straightforward way that many assume. Mortgage interest is still deductible, at least in principle (homophonic pun intended), for the vast majority of homeowners. However, whether they actually receive that deduction or not will depend on a myriad of other factors. Let’s walk through some of the relevant details.
How the Mortgage Interest Deduction Works
First, let’s start with the basics and a little background information. It’s important to note that none of the changes I’m about to discuss affect your 2017 taxes, so keep that in mind as you collect the tax forms from your bank or mortgage company in the next few days.
It also bears pointing out that the mortgage interest deduction allows deducting the amount of interest paid on the mortgage or home equity line of credit (“HELOC”), not necessarily the full mortgage payment. The principal, taxes or insurance portions of the payment are not deductible. On a typical 30-year mortgage, the majority of a payment is interest in the beginning stages of the loan, but that gradually changes so that each payment pays down more principal as time goes on. The payments on 15-year mortgages and older 30-year mortgages will have significant principal portions and, thus, will have smaller deduction values.
Now, the interest paid was (and still is under the TCJA) deductible as an itemized deduction. This is important because whether or not mortgage interest gets deducted will depend on the decision to itemize, which, in turn, depends on the total amount of itemized deductions. So, the mortgage interest deduction only matters if, once all itemized deductions are added together (things like charitable contributions, medical expenses, property taxes, state and local income taxes, and some miscellaneous expenses), the total was more than the standard deduction.
Even under the old rules, nearly all of the deductions mentioned above were limited in one way or another (making the analysis even more complicated), and mortgage interest was no exception. Under the previous tax law, only the interest on mortgage debt up to $1 million dollars could be deducted as an itemized deduction. Also, there was also an important stipulation even under the old rules that many homeowners overlooked (or were simply unaware of), which is that mortgage interest was only deductible to the extent it was used to acquire one’s principal residence, and home equity loans were only deductible to the extent the proceeds were used to “materially improve” the residence, with the generous exception that up to $100,000 of home equity debt could be deducted regardless of purpose. But practically speaking, these limitations affected very few Americans, because very few have mortgages over $1 million or HELOCs over $100,000. In addition, the tax forms at year end (on IRS Form 1098) from the banks do not differentiate between the usage of the loan funds, so it’s hard to imagine that taxpayers worried too much about it even if they were aware of these distinctions!
Can You Write Off Mortgage and HELOC Debt in 2018?
Now for 2018, the rules have changed in several ways, some of which are subtle and easy to miss. First, the amount of debt eligible for the interest deduction on a new mortgage or HELOC has been reduced from $1 million down to $750,000. More importantly, interest on new home equity debt that is not used to improve a personal residence is not deductible at all! However, there remain the important questions of whether the IRS form that homeowners receive will delineate between purchase/improvement debt and non-purchase/improvement debt and whether the banks and mortgage companies would know how the funds are used, anyway.
But focusing on the mortgage interest deduction rules alone is not enough to determine whether you will take the mortgage interest deduction. You still have to take into account your other itemized deductions to see if itemizing makes sense. (And remember, itemized deductions only matter when they are, in total, greater than your standard deduction.) First, keep in mind that the standard deduction has almost doubled for 2018, from $6,350 to $12,000 for single filers and $12,700 to $24,000 for those who are married filing jointly. However, many of the formerly popular itemized deductions were limited by the TCJA for 2018, including a new cap on the state and local tax deduction (SALT) to $10,000 in total and an elimination of a variety of miscellaneous deductions. When taking all of these factors (and more) into account, many fewer people will itemize on their tax returns this year.
Curtis Hearn, CFP®
The above article is intended to provide generalized financial information; it does not give personalized tax, investment, legal or other professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other matters that affect you our your business.