What is Relevant About the New Tax Law? Part 4: MORTGAGE INTEREST

New limits on mortgage interest deductions are included in the tax law signed by President Trump last December. For 2018, millions fewer taxpayers will benefit from deducting mortgage interest on Schedule A. Many won’t find it necessary to deduct mortgage interest because of the near doubling of the standard deduction to $24,000 for married couples and to $12,000 for singles. For example, if Fred and Ginger’s mortgage interest, state and local taxes, and charitable contributions average about $15,000 per year, they benefitted in prior years from listing these deductions on Schedule A. However, for 2018 they will not file Schedule A because they save more taxes by taking the $24,000 standard deduction instead. One of the objectives of the new tax law is to reduce the number of Schedule A filings by increasing the standard deduction so that Schedule A will not be necessary.

The new tax law does allow homeowners with pre-existing mortgages to continue deducting interest up to a total of $1 million in mortgage debt for a first and second home. If the first home has a mortgage of $800,000 and the second home has a mortgage of $400,000, the taxpayer may only deduct the interest on $1 million, not the total of $1.2 million. For new mortgages starting in 2018, the limit has been reduced to $750,000 of mortgage debt for a first and second home combined. If Fred and Ginger already have a $750,000 mortgage on their first home and a $200,000 mortgage on a second home, they can continue to deduct the interest on both.

If Fred and Ginger already have a home with a $750,000 mortgage and want to use a new $200,000 mortgage to buy a second home, they cannot deduct the interest on the second loan because they have already hit the allowed limit of $750,000 in mortgage debt. The new law also forbids deductions for home equity loans unless the proceeds are used to improve the property and unless the combined total of the first mortgage and home equity line of credit does not exceed $750,000.

Source: Wall Street Journal 2/14/2018

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