Q: Is mortgage interest still deductible on our federal income taxes? Is there something new that I am not aware of? Is there some reason to not have a mortgage that is different from what we’ve always believed?
Here’s why I’m asking: All of a sudden, it seems like we can’t deduct the interest in our tax preparation software. So we do our own taxes. My husband is one of those people who says doing taxes is easy: Just fill in the blanks on the software. So far, he has done them every year for the past 51 of our joint adult life. Our taxes are easy, always one employer. We are 73 years old, and my husband is still working at a job that he loves.
But this year, as we’re finally getting around to filing, the software is telling us we can’t write it off.
A: Thanks for your question; it’s a good one. Over the past couple of years, you may have missed our columns about the interest deduction on mortgage loan payments and the new limitations on the deductibility of state income tax and real estate taxes on federal income tax returns due to the Tax Cuts and Jobs Act (TCJA), which was signed into law on Dec. 22, 2017. Some people refer to this with the acronym SALT, for state and local taxes.
Let’s clear the air on the first point: Payments you make to a lender on your home mortgage are still deductible on your federal income tax return. However, one of the limitations from the TCJA is that you can only deduct the interest on a loan of up to $750,000. Most people have a mortgage on their primary residence and some even have a mortgage on a second home. If you do, you can only deduct the interest on the loan amount up to $750,000.
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If you have a $750,000 loan and your interest rate is 3 percent on that loan, you’ll end up paying around $23,000 in interest during the first year you take out the loan. (Your interest payments are usually higher when you first take out the loan and gradually go down over the life of the loan even though your monthly payments stay constant. This is the way the amortization of your loan works over a mortgage term.)
As a married couple, the federal government gives you a standard deduction of $24,800 (or $12,400 if you are single), so the standard deduction is quite high given where interest rates are today and what most homeowners pay in interest on their home loans.
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For you to benefit from the deduction, your interest payments along with any other deductions you and your husband can take on your federal income tax return must be higher than $24,800.
For example, you can deduct up to $10,000 in local property taxes and state income taxes, you can deduct medical expenses above a certain threshold amount, you can deduct charitable donations, and you can deduct casualty and theft losses subject to certain limits. These are just some examples, but for most homeowners, the standard deduction is now at a level that fewer taxpayers get any benefit from itemizing deductions.
If you live in a state that has no state income taxes and low property taxes, it’s likely you won’t have to itemize deductions unless you give a substantial amount of money to charity. Your loan interest and property tax payments will be much lower than the standard deduction of $24,800.
Even in states where you have state income taxes and/or higher property taxes, you’re still limited to deducting no more than $10,000 for state and property taxes. That leaves you with $14,800 before you hit the standard deduction. If your $300,000 mortgage carries an interest rate of 4 percent, your annual interest payments would be around $12,000. (We’ve rounded the numbers for simplicity purposes.) With the state and property deduction of $10,000 and the interest deduction of around $12,000, you’d still be below the standard deduction of $24,800.
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So for most homeowners, the standard deduction is the way to go and the deductibility of interest on a home loan doesn’t really affect a family’s federal income taxes. Not only that, but if you take the standard deduction, filing federal income taxes is easier and less complicated. And, as your husband says, it is not too complicated when you use software to help you out.
That’s why you may be unable to deduct interest this year. We still think filing federal income taxes is way too complicated and difficult for most citizens to figure out, and the rules and changes make it hard to know when you have done something right or wrong. Even with software to help.
Ilyce Glink is the author of “100 Questions Every First-Time Home Buyer Should Ask” (4th Edition). She is also the CEO of Best Money Moves, an app that employers provide to employees to measure and dial down financial stress. Samuel J. Tamkin is a Chicago-based real estate attorney. Contact them through her website, ThinkGlink.com.
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