It’s been called the most cherished of all tax deductions, rivaled only by Social Security as the most politically perilous of government measures to even talk about changing. And yet talk about mortgage-interest deductibility has indeed arisen as tax reform looms as part of the Trump administration’s agenda for 2017.
While no changes may ever be made--and most certainly none before 2017’s tax deadline in a few weeks--it’s a good time to review what might change with MID, who benefits from the measure at the moment, and a few basics about this tax cornerstone.
Q: What do Trump’s tax plans currently call for?
The initial chatter about the GOP’s tax-reform plans included speculation that MID might be eliminated entirely. The actual Trump plan, however, proposes only some changes that might limit the proportion of taxpayers who claim the deduction.
The plan adjusts the respective limits for itemized deductions and the standard deduction. Specifically, it proposes that all combined itemized deductions should be capped at $200,000 for married couples filing jointly and $100,000 for single taxpayers. At the same time, it calls for a doubling of the standard deduction a filer could take ($30,000 for married couples filing jointly and $15,000 for single filers) instead of claiming itemized deductions.
Q: How Might Those Changes Affect My Tax Return?
It might change--increase--how many filers claim the standard deduction, rather than itemize. It only makes sense to itemize your taxes if your itemized deductions exceed what you would be able to claim as the standard deduction. After you add up any eligible itemized deductions, you check how they compare against your standard deduction for that year. If the itemized expenses are lower, you'll be better off going with the standard deduction.
By increasing those standard deductions, the Trump proposal, if actually enacted, would tip the scale for some, maybe many, homeowners in favor of taking the standard deduction and away from choosing to itemize. For example, married homeowners would need to meet a $30,000 minimum threshold in mortgage interest and additional deductions for them to be worth itemizing. Otherwise, they’d be better off simply taking the new and higher standard deduction.
Q: And Might I Pay More Taxes With Such Changes?
It’s too early to say with great certainty; other tax measures could change the picture, for one thing.
But we can review who benefits most and least from MID at the moment. Those who benefit handsomely from the tax deductions offered to homeowners include people with large mortgages; high property taxes or state income taxes, or other significant itemized deductions. Also winners, as a rule, are people in relatively high income tax brackets, since the deduction cuts their taxes by a larger percentage.
It is people with the smallest mortgages, as well as those with the very largest incomes, who end up getting little to no benefit from the mortgage interest deduction.
Consider as an example, an older married couple who has built up a lot of home equity over the years and wants to refinance to a lower interest rate. Let’s say the remaining principal on their mortgage is $100,000. That’s about $4,000 in annual mortgage interest at today’s low rates, and far less than their standard deduction as a married couple. Their state taxes, property taxes and other itemized deductions might get them past the level of their standard deduction, but you can see how the tax benefits would wane with the size of the loan.
It’s also worth remembering though, you don’t get the tax deductions unless you’re actually paying the expenses of mortgage interest, property taxes, and mortgage insurance. Before you take the plunge and buy a home, tally up these amounts, along with any additional closing costs when buying, subtract your tax benefits, and see how your outlay compares to what you would pay to rent a similar property in your area.