Understanding the 2018 Mortgage Interest Deduction

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In 2018, the Tax Cuts and Jobs Act (TCJA) significantly changes the rules on how much mortgage interest Americans can deduct from their taxable income. While the law doesn't affect your primary mortgage this year if your loan started before December 15, 2017, we analyzed the changes to figure out how they'll affect people thinking about buying a house in the near future.

How Does the New Mortgage Interest Deduction Affect You?

In 2018, 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 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 in 2018

  • 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 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 current 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 Amount2018 Deductible First-Year InterestVs 2017 Deductible First-Year InterestVs 2018 Standard Deduction for Married Joint Filers
$550,000$23,580unchanged-$420
$600,000$25,724unchanged+$1,724
$650,000$27,867unchanged+$3,867
$700,000$30,011unchanged+$6,011
$750,000$32,155unchanged+$8,155
$800,000$32,155-$2,144+$8,155
$850,000$32,155-$4,287+$8,155
$900,000$32,155-$6,431+$8,155
$950,000$32,155-$8,575+$8,155
$1,000,000$32,155-$10,718+$8,155

Deductible interest based on the first 12 months of interest paid for a 30-year mortgage at current average rate of 4.32%.

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.

Should You Itemize or Take the Standard Deduction in 2018?

The TCJA has also increased the standard deduction for each filing status, which means that fewer homeowners will find an advantage in itemizing their deductions instead of taking the standard deduction. 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 StatusStandard Deduction"Break-Even" Mortgage Balance to Itemize
Single$12,000$280,000
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.

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