November 30th, 2016 3:52 AM by Jackie A. Graves
laws encourage home ownership with a variety of tax breaks, and the largest involves
deducting the interest that homeowners pay on mortgages. Right now, there
aren't major legal changes on the books that will affect the mortgage deduction
in 2017, but the recent results of the presidential election point to a broader
shift that could have implications for some homeowners in the future. Let's
look more closely at how the mortgage interest deduction works and how it
interacts with other home-related tax breaks.
Homeowners can typically take the mortgage interest they pay for
loans on their home and include it in their itemized deductions. There are two
separate provisions that apply to most homeowners. For what's known as home
acquisition debt, the limit on deductible interest is whatever a mortgage of $1
million costs. Home acquisition debt includes what you borrow in order to buy,
build, or substantially improve either your main residence or a second home.
You can also refinance such a mortgage and still have it treated as home
acquisition debt. Multiple mortgages can be deductible, as long as the
principal balance doesn't exceed the $1 million limit, or $500,000 for married
taxpayers who file separately.
addition, interest on home equity debt can also be deductible. Home equity debt
essentially includes any other loan that is secured by your main home or second
home. A lower borrowing limit of $100,000 for most taxpayers or half that for
married taxpayers filing separately applies to home equity debt.
The portion of your monthly payment that goes to interest
clearly counts as deductible mortgage interest for these purposes. However,
there are a couple of special cases that need further explanation.
First, if you pay upfront points when you get your mortgage, the
way you can deduct them varies. In some cases, as long as you use the loan to
buy or build your main home and the amount of points paid is consistent with
industry practice in your area, then you might be able to deduct your points as
interest in the year you pay them. That typically includes the first mortgage
you take out when buying a home. By contrast, refinancing and borrowing for
other purposes don't qualify for immediate deduction of points, but you can
still amortize the deduction over the course of the loan.
Next, the question of whether private mortgage insurance
payments are deductible is still an open question for 2017. Late last year,
lawmakers extended the annually renewing provision through the end of 2016.
However, it hasn't considered whether to extend beyond the end of this year,
and so taxpayers will have to wait to see if a last-minute set of tax extenders
includes the provision.
One big question mark involves what the newly elected president
will do with anticipated tax reform efforts. Few expect any new tax plan to
include specific provisions eliminating the mortgage interest deduction, and
Congress has repeatedly steered clear of hitting mortgage interest in its looks
at various tax deductions more broadly.
One Trump proposal during the campaign did impose a limit on
itemized deductions at $100,000 for single filers and $200,000 for joint
filers. It's conceivable that for some high-net-worth individuals, such a cap
might reduce total itemized deductions, and some would see that as a limit on
mortgage interest deductions. However, given the existing $1 million and
$100,000 caps and since interest rates are so low, mortgage interest would
rarely make up a substantial portion of total deductions exceeding the $100,000
or $200,000 thresholds.
If you own a home, you're probably aware of the tax
ramifications of your purchase, and deducting mortgage interest can be a big
part of what makes your home affordable. Fortunately, homeowners shouldn't
expect anything that hurts their ability to cut their taxes through claiming a
mortgage interest deduction.
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