Trump Tax Bill, How It Affects Your Mortgage Interest Tax Write-Off

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The Tax Cuts and Jobs Act is a large tax cut law that many experts believe will increase jobs, investment and economic growth. How much this is the case remains to be seen in 2018 and beyond. But if you own or are buying a home, you are certainly curious how the Trump tax law will affect your mortgage interest and other tax write offs. This article will provide you with what you need to know about the status of your mortgage tax write offs for 2018. This information is especially important for people who live in higher cost areas with home values above $750,000. The new tax law does not apply to current mortgages, only new ones written in 2018 and after.

Overview

A major part of the new tax law is a large corporate tax cut that is decreasing the rates from 35% to 21%, which many experts think will stimulate growth and employment in the United States. Individuals also will see a significant tax cut, but these rates will expire in 2025. It is believed however that there will be a lot of pressure on Congress to extend those tax cuts for individuals.

The best news for most taxpayers across the US this year is that most will get a tax cut. The individual rates will be reduced across the board. The law is going to lower the rates in all seven brackets, and also will lower the threshold in each of the brackets. This will apply to taxpayers who are joint filers too.

The new tax law in 2018 will double the standard deduction to $12,000 and $24,000 for single and joint filers, respectively. If you do not have a lot of deductions, this means that taking the standard tax deduction will exempt double your income from federal taxes. This could mean that many renters and even more home owners will see a smaller tax bill. It could cause fewer home owners to itemize their taxes because the new, larger standard deduction is greater than their itemized expenses as homeowners.

It is also likely that the corporate tax cut will help people’s stock and mutual fund portfolios.

Mortgage Interest Deduction Is Capped at $750,000

For many years, the mortgage interest tax deduction has been one of the most important parts of owning a home in the US. Before, you could write off the interest on up to $1 million in mortgage debt each year on your taxes. This was a major tax benefit for millions of home owners. It is surprising to some experts that the tax code was changed. In the House version of the bill, the limit on writing off mortgage interest was $500,000. But in the final law, the new limit is $750,000.

Most homeowners do not have homes that are above $750,000 so this will not influence mortgage interest write offs for much of the country. In fact, it is estimated that only 2% of all mortgages in the US that were written from 2013 to 2015 were more than $750,000 in total value. However, if your home is in California, New York, New Jersey or another higher cost area, you could find that you are limited in your ability to write off mortgage interest. It is estimated that 45% of the home values more than $750,000 are in California.

Note that if you have a mortgage already, the new cap will not apply to you. It only applies to new mortgage loans written in 2018 and beyond. With the double standard deduction, the decreased ability to write off interest may not even apply to you. A study done by Zillow found that 45% of homeowners have homes worth enough to make it logical to itemize and take the interest deduction under the old tax laws. This drops to only 15% under the new law.

State and Local Tax Deductions Capped at $10,000

Another major factor that will affect many homeowners’ tax deductions on their mortgages is the cap on state and local tax deductions. Under the old law, taxpayers did not have any limit on the amount of deductions they could take for state, local, property, and sales taxes on their federal tax returns. But the new law sets the limit on property, income and sales taxes to $10,000.

This will be a concern for you if you live in a coastal area with higher local and state taxes – California again comes to mind. This change may have a major impact on your tax bill, even when you account for the lower rates and the doubling of the standard deduction.

There are plans afoot in California to get around the new cap on state and local tax deductions. Under plans being made by the state legislature, Californians would be able to make a charitable contribution to what is known as the California Excellence Fund, which would provide taxpayers with a state tax credit. The credit could be used to avoid paying SALT taxes and would render the cap on SALT deductions as moot.

If you are getting a new mortgage and live in a higher cost coastal area that tends to vote Democratic, you will want to look closely at how the new Trump tax law is going to affect your tax write offs.

With over two decades in the mortgage sectors, Mr. Dornan brings a lot of experience to the table. Bryan Dornan has founded several lending companies and written several hundred articles related to home financing, real estate and more.

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