Can I Claim the Mortgage Interest Deduction?
The tax code underwent significant changes in 2017, and homeowners across the United States have been feeling the effects. If you're a homeowner, you might have noticed that the once-beneficial tax deductions for property taxes and mortgage interest are no longer as accessible. However, this doesn't necessarily mean your taxes have increased. Let's delve into the updated rules and see how they might affect your tax situation.
#### The Rise of the Standard Deduction
One of the most notable changes from the 2017 tax reform was the substantial increase in the standard deduction. For the 2022 tax year, the standard deduction has risen to $25,900 for married couples filing jointly, $19,400 for heads of household, and $12,950 for single filers. This nearly doubled amount compared to pre-2018 figures means that many homeowners no longer need to itemize deductions, as the standard deduction exceeds their potential itemizable expenses.
Evan Liddiard, a CPA and director of federal tax policy for the National Association of REALTORS®, explains that while this shift simplifies tax filing for many, it also removes the tax incentive for homeownership that once existed. The result? The percentage of homeowners who benefit from itemizing has dropped significantly.
#### The Disappearance of the Personal Exemption
Another change that came with the tax reform is the elimination of the personal exemption. Previously, taxpayers could deduct $4,150 for each household member, which, for some, could offset the benefits of the increased standard deduction. Now, the impact of this change varies based on family size and composition. For instance, single filers and childless couples may still come out ahead, while families with multiple dependents over 16 might find themselves at a disadvantage.
#### Mortgage Interest Deduction: A New Cap
The mortgage interest deduction now has a cap of $750,000 on loan amounts, down from the previous $1 million. This change primarily affects homeowners in high-cost areas or those with particularly expensive properties. However, loans in place by December 15, 2017, are grandfathered in under the old cap.
#### State and Local Tax Deduction Limits
The deduction for state and local taxes (SALT), which includes income, sales, and property taxes, is now capped at $10,000 for all filing statuses, except for married individuals filing separately, who are capped at $5,000 each. This cap hits taxpayers in high-tax states the hardest, as many used to deduct well over the $10,000 limit.
#### Rental Property and Home Equity Loan Deductions
Landlords can breathe a sigh of relief, as there are no new limits on mortgage debt interest or state and local taxes for rental properties. Additionally, interest on home equity loans is still deductible if used for significant home improvements and within the overall mortgage cap.
#### Mortgage Debt Forgiveness and Mortgage Insurance Premiums
For those who have had mortgage debt forgiven in a foreclosure or short sale, the forgiven debt is not taxable through the end of 2025. The deduction for private mortgage insurance is also back, but only for itemizers earning up to $109,000 annually.
#### Tax Tips for Homeowners
Even if the standard deduction is now your best bet, there are still ways to potentially reduce your tax bill:
1. **Buying as a Single Person**: Single homeowners may find it easier to surpass the standard deduction threshold, potentially leading to greater tax benefits.
2. **Student Loan Interest**: You can deduct up to $2,500 for student loan interest paid, regardless of whether you itemize.
3. **Charitable Contributions and Medical Expenses**: Generous donations and significant medical expenses can still be itemized and may push you over the standard deduction limit.
4. **Paying Down Your Mortgage**: If your mortgage exceeds the $750,000 cap, consider paying it down faster to avoid non-deductible interest.
The tax landscape for homeowners has certainly changed, but with careful planning and a clear understanding of the new rules, you can navigate your taxes effectively. Always consult with a tax professional to ensure you're making the most of your tax situation.