Starting in 2018, the Tax Cuts and Jobs Act (TCJA) significantly changed the rules on how much mortgage interest Americans can deduct from their taxable income. If your primary mortgage began before December 15, 2017, the TCJA's changes won't apply to you until 2025. If you're thinking about buying a house in the near future, we analyzed these mortgage deduction changes to determine how they'll affect you.
How Does the New Mortgage Interest Deduction Affect You?
For the 2018 tax year, Americans will be able to deduct the interest they pay on their mortgages for up to $750,000 in new mortgage debt. Married couples filing taxes separately can claim up to $375,000 each in mortgage interest deductions. This is a decrease of the former limit of $1 million for single filers and married couples filing jointly, and $500,000 for married couples filing separately.
Mortgage Interest Deductibility - By the Numbers
- Interest payments are deductible on mortgage debt of up to $750,000—formerly $1,000,000
- Married couples filing separately can deduct interest on up to $375,000 each—formerly $500,000
- Up to 2025, these new limits won't apply to mortgages originated before December 15, 2017
- Deduction for other home equity debt (HELOCs and second mortgages) eliminated—formerly $100,000
In the short term, these changes only affect people who take out new purchase mortgages. Anyone who purchased a home before December 15, 2017 will be able to deduct mortgage interest payments on up to $1 million in debt, up until 2025. Even if you refinance, the old limit applies as long as the original debt was taken on before December 15, 2017. Finally, people who closed on a home purchase before January 1, 2018 can also use the old limit of $1 million—provided they purchase the residence by April 1.
Besides reducing the maximum deduction for mortgage interest, the new rules completely eliminate the deduction for interest paid on other home equity debt. Previously, taxpayers could deduct up to $100,000—$50,000 for married couples filing separately—on the interest payments for home equity loans and home equity lines of credit (HELOCs).
How Much Mortgage Interest is Deductible Starting in 2018?
Since the new rules don't apply to existing mortgages, we calculated the deductible based on the first year of a new 30-year mortgage. To calculate the first year of interest, we used Freddie Mac's reported average rate for a 30-year mortgage and a loan balance of $750,000. A loan of that amount would cost $32,155 in interest during the first year. For mortgage borrowers who owe between $750,000 and $1 million (the former limit), this represents a loss of up to $10,719 in deductible interest.
2018 Changes to Mortgage Interest Deductibility
|Mortgage Amount||2018 Deductible First-Year Interest||Vs 2017 Deductible First-Year Interest||Vs 2018 Standard Deduction for Married Joint Filers|
Deductible interest based on the first 12 months of interest paid for a 30-year mortgage at an assumed rate of 4.32%. Higher mortgage rates will lead to higher deductible interest.
The new tax law reduces the advantage of itemizing mortgage interest over taking the standard deduction. When compared to the new standard deduction of $24,000 for married couples filing jointly, the first-year mortgage interest on a balance of $750,000 would offer $8,155 more in deductions. In 2017, itemizing mortgage interest on that amount allowed homeowners to deduct $19,000 more than the old standard deduction of $12,700.
How Much Can You Deduct on Multiple Mortgage Balances?
Since publishing this article, we've received some great questions from our readers. One homeowner asked how the mortgage interest deduction rules apply if she has two mortgage balances: one that started in 2010 and another in mid-2018. After some research, we determined that the situation can be broken down into a few different scenarios:
|Scenario||Total Interest-Deductible Debt Limit|
|Both your primary mortgage and second mortgage started before December 15, 2017.||Old $1 million limit applies cumulatively to both loans|
|Both your primary mortgage and second mortgage started after December 15, 2017, and you signed no purchase agreements before that date.||New $750,000 limit applies cumulatively to both loans|
|Only one of your mortgages began before December 15, 2017 and that mortgage is at least $750,000||Old $1 million limit applies, but you won't be able to deduct any interest paid on mortgages that started after December 15, 2017|
|Only one of your mortgages began before December 15, 2017 and that mortgage is under $750,000||Old $1 million limit applies, and you can deduct interest paid on any post-December 15 mortgage debt equal to the difference between $750,000 and your older mortgage balance|
Let's compare two homeowners who each have two outstanding mortgage balances. Homeowner A owes $600,000 on a home purchased before that date and another $800,000 on a home bought afterwards. Homeowner B faces the reverse situation, owing $800,000 on a mortgage starting before the cutoff as well as $600,000 on a second loan that started afterwards.
Comparing Two Homeowners in Dual-Mortgage Scenarios
|Deductible Loan Limit||Homeowner A||Homeowner B|
|Mortgage #1 - Before 12/15/2017||$1,000,000||$600,000||$800,000|
|Mortgage #2 - After 12/15/2017||$750,000||$800,000||$600,000|
|Mortgage #1 Qualifying Balance||$600,000||$800,000|
|Mortgage #2 Qualifying Balance||$150,000||$0|
|Total Qualifying Balance||$750,000||$800,000|
How do the rules apply here? For Homeowner A, the old $600,000 mortgage is less than the both the $1,000,000 and $750,000 limits. That leaves either $400,000 or $150,000 in interest-deductible debt to apply on Homeowner A's second mortgage. Because that second mortgage began after the cutoff date, we must use the $750,000 limit. That allows Homeowner A to deduct interest on $150,000 of additional mortgage debt, for a grand total of $750,000 across both loans.
Homeowner B's situation looks a little different. Because she a majority of her total debt falls prior to the cutoff date, every dollar of her old $800,000 mortgage balance qualifies for interest deduction under the old $1,000,000 limit. But because the qualifying loan limit is cumulative, Homeowner B won't be able to claim deductions on any interest paid against her newer mortgage.
Since she has deducted interest on $800,000 already, there is simply no space left under the $750,000 cap that applies to Homeowner B's post-2017 loan. If both of Homeowner B's mortgages predated the cutoff, it's likely that she would be able to deduct interest on up to $1,000,000 of debt.
The rules on mortgage interest deduction grow far more complicated for taxpayers with multiple properties, and professional guidance is often well worth the price in such cases. IRS Publication 936 offers a comprehensive guide to calculating your qualifying mortgage debt limit, as well as a primer on how to tell if your mortgage debt qualifies for deduction. We suggest a close look at page 2, Part I and the worksheet on page 11.
Should You Itemize or Take the Standard Deduction in 2018?
Under the new law, the increased standard deduction and lowered mortgage interest deduction mean that fewer people will find it better to itemize deductions. While people with existing mortgages can simply examine their most recent year of interest payments to decide whether itemizing is worthwhile, we calculated the effects of the 2018 rules on people who plan to get new home loans.
Itemized Mortgage Interest vs Standard Deductions, 2018
|Filing Status||Standard Deduction||"Break-Even" Mortgage Balance to Itemize|
|Married Filing Jointly||$24,000||$560,000|
|Head of Household||$18,000||$420,000|
Based on first-year interest costs for a 30-year mortgage at the current national average rate of 4.32%.
The table shows how much mortgage debt you need before your deductible interest in the first year outweighs the standard deduction. For example, if you're single and borrow at least $280,000 to buy a home at the current average rate, you can claim more deductions on your first year of mortgage interest than you could with the standard deduction. Since most people can add deductions from other spending, it may make sense to itemize even if your balance is slightly less than the break-even amounts we calculated.
Of course, your particular situation will depend on the specific interest rate you obtain for your home loan, as well as the number of monthly mortgage payments you make before tax season arrives. And because fixed-rate mortgages are amortized into equal monthly payments, you pay fewer dollars towards interest—and more towards principal—every month. Thanks to these variables, the easiest way to determine whether itemizing deductions makes sense is to examine your monthly mortgage statements and add up the interest you've paid over the taxable period.