How much mortgage interest can I deduct on my schedule A, itemized deductions, under the new tax law, the Tax Cuts and Jobs Act (TCJA)? That is a great question but the TCJA limits the loan size of which you can deduct interest on and not on the interest amount. I know, that is a challenge to wrap your mind around and it raises more questions.
Before we get to those questions we need to address the new standard deduction first as those question may be irrelevant now for many taxpayers.
Standard DeductionWhy is the new standard deduction relevant? Because it is now much higher and as a result a much higher percentage of taxpayers will be better off taking the standard deduction rather than itemizing. The new standard deductions for 2018:
Married Filing Joint and Surviving Spouse filers $24,000
Head of Household $18,000
Single and Married Filing Separately $12,000
Additional Standard Deduction
Elderly (65 or over) or Blind MFJ $1,300
If Unmarried $1,600
Taxpayers need only be concerned about the limitations discussed below if their total itemized deductions could exceed their standard deduction. However, if your standard deduction is higher than your itemized deductions you may be still be able to deduct a portion of your mortgage interest if you are able to claim a home office deduction for your business.
Mortgage Interest Deduction Limits Under the TCJA
Loans Taken Out On or After December 17, 2017For loans taken out on or after December 17, 2017 you are able to deduct interest on loans up to $750,000 of mortgage debt. For those filing Married Filing Separate the loan amount limit is $375,000. According to the IRS, "the limits apply to the combined amount of loans used to buy, build or substantially improve the taxpayer's main home and second home."
Whatif t he combined amount of loans used to buy, build or substantially improve the taxpayer's main home and second home exceeds the loan amount limit? According to an example given by the IRS, "a percentage of the total interest paid is deductible (see Publication 936). As of the time of writing this post, Publication 936 is not yet available for 2018.
The 2017 version of Publication 936 explained the calculation of deductible mortgage interest calculating it as a percentage of the total qualified home mortgage interest paid. So you were not able to take all of interest on the loan with a higher interest rate and a portion of interest from the loan with a lower interest rate.
Loans Taken Out Before December 17, 2017The limits on loan amounts taken out before December 17, 2017 are $1,000,000 and $500,000 for those using the Married Filing Separate filing status.
Home Equity Loans and HELOCsThe new tax law did away with the mortgage interest deduction for Home Equity Loans and HELOCs unless they were used to improve your property. If you did take out one of these loans to improve your home the deductibility of this interest is still based on the limits discussed above.
Additionally, you will want to keep good records of the use of the proceeds from these loans to improve your home in case of an audit.
Bunching Itemized Deduction StrategyTo increase your itemized deductions and lower your taxes you could make extra payments in 2018 to increase your itemized deductions. You may be able to make your January mortgage payment early and deduct the portion of that payment which is for your interest for December of this year. In addition, if you are over the threshold for deductible medical expenses you could make those doctor visits before year end. Finally, you could also make extra charitable contributions before year end. Realize these strategies are best used if you are close to the standard deduction and use these strategies to take a higher itemized deduction in one year and take the standard deduction the following year. Otherwise with just itemized deductions you are taking a deduction this year that will lower your deductions the following year. Of course you probably want to lower this years taxable income as much as possible but not necessarily, it depends on what you expect next year to be like from a tax standpoint. It is best to discuss this strategy your "tax guy", and I would be happy to be your "tax guy".
You probably noticed that I left out state and local taxes. That is because starting in 2018 that part of your itemized deductions is capped at 10,000 a year. For now at least.
Year End HelpI have regular year end conversations about this topic with many of my clients starting toward the end of their third quarter. Yes I prefer to talk to my clients throughout the year, and not just at tax time. While I charge more for tax planning, it enables me also to provide more value for you rather than merely preparing tax returns. This would enable you to get real value that affects your bottom line. So if you want a CPA that gives you more than tax returns then email me using my contact information below to setup an appointment to discuss your situation.
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What the New Tax Law Will Do To Your Mortgage Interest Deduction - MarketWatch
Interest on Home Equity Loans Often Still Deductible Under New Tax Law - IRS
Mortgage Tax Deduction Calculator - Bankrate
How the New Tax Law Will Impact Your Housing Costs - Forbes
Be careful when reading about tax law and its application, including my articles, because the wording and definitions are such a challenge and are influenced by writers perspective, specifically his own clients situations that he is mindful of and other situations the writer is not thinking of. The point is talk to your CPA about your situation and circumstances and don't rely on or make conclusions based on articles you read, including articles form irs.gov, because concepts and definitions are not very clear, and of course, they are subject to change. Now is the time to be having discussions about your situation and developing strategies for you and your business. Again, contact me using my information above to discuss your situation. I help business owners all over the U.S. and in foreign countries with their tax returns.