Taxpayers have long been able to deduct mortgage interest on their taxes. And then came the Tax Cuts and Jobs Act. While the Act did change the type and amount of deductions, it didn’t entirely eliminate the mortgage interest deduction.
Taxpayers may still be eligible to deduct mortgage interest paid. It depends on a variety of factors, including whether or not you will be able to deduct mortgage interest at all.
Can you Deduct Mortgage Interest on Your Taxes?
Here’s the big question. Can you deduct mortgage interest on your taxes? It depends on one thing. Do you have more deductions than the updated standard deduction? The standard deductions are:
- $12,200 for single filers
- $24,400 for married filing joint filers
If you don’t have more deductions than the standard amount, it doesn’t make sense to deduct mortgage interest. You’d be cheating yourself of tax deductions if you opted to write off the mortgage interest.
What Loans can you Write Off?
Before, you were able to write off mortgage interest on any home loan. After the TCJA, you may only deduct interest on loans that ‘substantially improve your home.’ Obviously, this includes the loan used to purchase your home. But any second liens may or may not be deductible.
If you can prove you used the funds to fix up the home in some way, you may be able to deduct the interest. If you used the funds for anything besides buying or fixing up a home, it won’t count. This only pertains to loans on first and second homes, too. Any investment homes or homes beyond your second home don’t count.
How Much Mortgage Interest can you Write Off?
If itemizing your deductions gives you a higher deduction than what’s stated above, you may be able to write off your mortgage interest. The Tax Cuts and Jobs Act, however, limits how much interest you may write off.
The TCJA cut the amount of mortgage interest you may deduct. The limit is now $750,000. This includes all debts used to purchase or fix up your home. For example, if you have a first loan for $500,000 and a second loan for $250,000, both used to buy or fix up your home, you may deduct all of the interest paid.
If you have a first loan for $600,000 and a second loan for $200,000, you may only deduct the interest paid on the first $750,000. The interest on the remaining $50,000 isn’t deductible.
Should you Itemize or Take the Standard Deduction?
You may feel like you have to write off your mortgage interest. After all, a number in the thousands, who wouldn’t want to write that off?
Today, it depends. It may not make sense to do so. Going back to the standard deduction, you may have a higher write off by taking the $12,200 or $24,400 write off. If your mortgage interest is your largest and/or only itemized deduction, you probably won’t cross the standard deduction threshold. If however, you have many other deductions, such as unreimbursed employee expenses, self-employment expenses, property taxes, and charitable contributions, you may come out ahead itemizing your deductions.
Can you Deduct Your Property Taxes?
Before the Tax Cuts and Jobs Act came into existence, you could deduct your property taxes on your tax returns. That is still true today. But, you may not deduct the full amount. Only property taxes up to $10,000 are deductible. You may only deduct the property taxes you pay for the time you live in the home. If you pay a seller’s delinquent taxes in order to clear a lien and buy the home, you can’t write those taxes off.
Deciding What to Do
Before you file your taxes, get with a tax advisor and/or evaluate your year-end tax forms yourself. Look at the amount of mortgage interest and property taxes you paid. Think about any other deductions you may be eligible to receive. Do they come close to totaling more than the standard deduction? If they don’t, taking the easy route and filing with the standard deduction will give you better and easier results.
As always, check with a tax advisor. Tax laws change frequently. Know the latest laws and how they affect your taxes. Writing off your mortgage interest can save you money, but with the higher standard deductions, you may not need to. Consider it a blessing in disguise – you still save as much or more on your taxes without the headache of itemized deductions.