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?
- How Much Mortgage Interest is Deductible in 2018?
- Should You Itemize or Take the Standard Deduction in 2018?
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.