As a homeowner, you have access to some tax benefits that renters do not have. Among these benefits is the ability to deduct the interest you pay on your mortgage loan when filling out your income tax return.
Considering how much interest you pay on a mortgage loan, especially if you make payments throughout the entire life of the loan, this offers you some significant savings over that time, so long as you actually claim the deduction on your taxes.
Here’s some information about how you can accomplish that.
Changes under the new tax law
The new Tax Cuts and Jobs Act, passed by Congress at the end of 2017, changed a lot of income tax deduction rules and completely eliminated other deductions. The mortgage interest deduction is still available for homeowners, though its terms have changed somewhat. With this being the first year that the law is in effect, many homeowners will have to learn new rules that will affect their tax filing processes this coming spring.
Under the new legislation, if you purchase a new home between now and 2026, you’re able to deduct the interest on up to $750.000 in mortgage debt used either for purchasing or improving the home. This maximum limit affects all home purchases made after December 14, 2017. Unless new legislation is passed before then, the law will revert to its previous state in 2026.
If you took out a mortgage on December 14, 2017 or earlier, you’ll be able to deduct interest on up to $1 million in mortgage debt, which is what the cap was under the previous law. This $1 million limit stands even if you refinance the loan to get a lower rate.
Before the new law, interest on up to $100,000 for home equity loans taken out for home improvements were also deductible, which meant technically you could claim mortgage interest deductions on up to $1.1 million of home value. However, the Tax Cuts and Jobs Act eliminated home equity debt deductions, including those made on existing loans.
The vast majority of homes in the country are worth less than $750,000, which means this single change will not affect most homeowners on their taxes. However, buyers in expensive housing markets (especially in coastal areas) will be hurt, as that’s $250,000 less of a loan for which they’ll be able to deduct interest. The law also discourages people living in extremely valuable homes from moving, because they’d likely be moving to a new highly valuable home for which they would not be able to deduct as much interest.
To learn more about how the Tax Cuts and Jobs Act affects various deductions you may previously have taken on your taxes, including mortgage interest, contact us today at MCG Solutions.