What Do the New Laws Say About Deductions for Mortgage Interest and Taxes?

Recent law changes impose limits on the amounts that home owners who itemize deductions on Form 1040’s Schedule A are able to deduct for interest payments on mortgages for their personal residences. Julian Block clarifies what's changed and what will be expected now.

Mar 24th 2020
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Recent law changes impose limits on the amounts that home owners who itemize deductions on Form 1040’s Schedule A are able to deduct for interest payments on mortgages for their personal residences.

The old rules that apply for 2017 and previous years. They allowed itemizers to deduct payments for interest on as much as $1 million of mortgage debt for a main home and a second home used as a vacation retreat.

The revised rules that apply for 2018 and later years. They decrease the mortgage-debt ceiling for new buyers. The ceiling drops from $1 million to $750,000 for married couples filing jointly and single persons and $375,000 for married persons filing separate returns. More in a moment on when some unmarried couples each get to deduct interest on up to $750,000 of debt. 

Only one bite at the apple for new buyers. They must apply the decreased ceilings to the combined total of loans used to buy, build or substantially improve a person’s main home and second home.

Adios to deductions for interest payments on home-equity loans. The new rules abolish any write-offs for interest on home-equity loans. The old ones allowed deductions for interest on as much as $100,000 of such loans; they imposed no restrictions on how the borrowings could be used. It was okay to use them for, say, cars or furniture.

Then there were the borrowers who used their homes to secure unusual debts, like my former clients, proud parents Abner and Daisy. They used the loan proceeds to make a nonrefundable payment of $100,000 for daughter Sadie’s wedding reception, a maneuver that ended badly for Abner, Daisy, Sadie and me.

Sadie’s nuptials never took place; the future bride backed out when she met another Mr. Right who was more to her liking. Abner and Daisy decided to drop an unimaginative adviser who couldn’t justify a tax deduction for their six-figure outlay.

Payments of state and local income taxes and property taxes. The new rules also cap write-offs for such payments. The ceilings are $10,000 for couples filing jointly and single persons, dropping to $5,000 for married couples filing separately.

Several of my tax-savvy clients asked me to devise a strategy that would make it possible for married couples filing separately to qualify for two deductions of as much as $10,000. I told them that could happen only if they end their marriage.

Happy ending for unmarried couples who buy pricey homes, remain unmarried and file separate 1040s: Each is entitled to deduct up to $10,000. The IRS couldn’t care less that that they take out one loan to purchase their dwelling. Also, they’re each able to deduct interest on as much as $750,000 of mortgage debt.

The IRS isn’t censorious. It’s simpatico when unmarried couples are, say, straight, same-sex, or siblings.

Some pre-purchase reminders for unmarried couples who might later split: Enter into cohabitation agreements that cover what happens when they sell or otherwise dispose of their homes.

What if one partner wants to leave half of the residence to the other? Well, then they both need to write wills.

Who are the individuals hardest hit by the ceilings? Those who reside in Democratic-leaning coastal states like California, Connecticut, New Jersey and New York and have resigned themselves to annual payments of state and local income taxes and property taxes that aggregate well above $10,000. 

Indexing. Not by happenstance, the brackets for income taxes and the standard deduction amounts that are available to persons who opt not to itemize outlays for things like medical expenses and charitable contributions are “indexed,” meaning they’re adjusted annually to reflect any intervening inflation, whereas there’s no indexing for the ceilings on mortgage interest and state and local income taxes and property taxes.

How long are the new rules and their ceilings supposed to be around? They apply for the years 2018 through 2025. Come 2026, they’re scheduled to go off the books and the old, no-ceiling rules return. Good luck with that, as there’ll be intervening presidential and mid-term elections; lots could happen.

Additional articles. A reminder for accountants who would welcome advice on how to alert clients to tactics that trim taxes for this year and even give a head start for next year: Delve into the archive of my articles (more than 300 and counting). 

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