Filing Taxes

Is Home Equity Loan and Mortgage Interest Still Tax Deductible?

March 26, 2019

Some people look forward to tax season as much as a visit to the dentist’s office. Others are excited about the possibility of a sizeable tax refund and view April 15 with great anticipation. In either case, this year’s tax filing won’t be a simple repeat of last year.

The Tax Cuts and Jobs Act (or tax reform), enacted in December 2017, became effective in the 2019 filing season and has brought with it a few noteworthy changes to deductions that will likely impact many homeowners. Rest assured, there are still financial benefits of homeownership. If, however, you were relying on your home loan interest to reduce your taxable income, here are some key points you should know about the changes to standard and itemized deductions and how they impact your ability to claim a mortgage or home equity interest deduction this year.

What is Meant by Home Mortgage Interest?

In most cases, home mortgage interest is the interest paid on a loan that is secured by your main home or second home. This could be the interest paid on the original mortgage you obtained to purchase the home or a home equity loan aka second mortgage.

How Changes to the Standard Deduction Change Everything

The standard deduction, which effectively reduces your taxable income, is nearly double that from last year for each filing status.

 

Filing Status                            2017 Standard Deduction      2018 Standard Deduction*

Single                                                  $6,350.00                                $12,000.00

Married Filing Jointly                     $12,700.00                              $24,000.00

Married Filing Separately              $6,350.00                                $12,000.00

Head of Household                          $9,350.00                                $18,000.00

*Amounts might be higher if you or your spouse are over age 65.

Take the standard deduction, and you won’t be able to claim an itemized deduction for mortgage interest. Therefore, the decision to itemize deductions should be made in light of the potential benefits. Taxpayers should not automatically assume that since they have always itemized deductions, they should do so again this year. If you’re able to take the standard deduction and the total is more than the sum of your itemized deductions, it might be more advantageous to claim the standard deduction to reduce tax liability.

The New Deduction Limitations

You can still deduct home equity loans and home mortgage interest under the Tax Cuts and Jobs Act, with a few caveats. Before itemizing loan interest, you must determine if you’re eligible to do so. New rules, which are expected to remain in effect through 2026, place limitations on what type of mortgage interest is deductible and limits the amount even if you qualify.

Qualification Limits

Home equity loans are sometimes used to pay off credit card debts, student loans or pay for other personal expenses. New requirements prohibit taxpayers from deducting interest paid on home equity loans used for those purposes. Generally, to qualify for a home equity loan or mortgage interest rate tax deduction, loan proceeds must be secured by your main home or second home, aka qualified home, and have been used to buy, build, or substantially improve the qualified home. Please see IRS 2018 Publication 936 Home Mortgage Interest Deduction for special situations.

Dollar Limits

Did you purchase a new home in 2018? Home mortgage interest deductions are now limited to $750,000 ($375,000 if married filing separately) of qualified home loans. The new limit represents a reduction of $250,000 ($125,000 if married filing separately) from last year. However, higher limits of $1 million ($500,000 if married filing separately) are still in effect if the loan originated on or before December 15, 2017.

*Please visit the IRS Tax Reform page to determine how changes to the tax laws impact your specific situation.

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