Guest post by Greg Williams
The much ballyhooed (or maligned, depending on your perspective) Tax Reform bill has been signed into law and with it comes significant changes in deductions used to lower your taxable income. We will examine a couple of mortgage-related items in this column and dispel some misconceptions about the subject of mortgage interest deductions.
First, the mortgage interest deduction is not going away. The confusion about the issue likely stems from the increased standard deduction, which has been doubled, now standing at $12,000 for single filers and $24,000 for married filers. This change means that many homeowners won’t be itemizing anymore because they pay less interest and have lower itemized deductions than the $12,000/$24,000 standard deduction threshold.
As for the tax code changes, the mortgage level you can deduct interest from has been lowered from one million dollars to $750,000. First mortgages up to $750,000 remain fully deductible if you continue to itemize. Second mortgages and Home Equity Lines of Credit (HELOCs) are a bit more complicated. Going forward with the new tax law, if you used the proceeds of a second mortgage (either a fixed second mortgage or a HELOC) to acquire (purchase/buy) the property, then you can still deduct the first $100,000 of interest as long as your combined mortgage balance doesn’t exceed $750,000. If you added the 2nd mortgage after the property acquisition, the interest will no longer be deductible.
Second, if you are rushing to prepay your January 2018 mortgage payment in order to deduct the interest, take a quick glance at your situation and see if it’s the best decision for you. Mortgage payments are comprised of four items: Principal, Interest, Taxes, and Insurance, an acronym commonly known as PITI. Mortgage servicers will not accept partial payments so if you want your payment to be accepted and credited, you have to make the whole payment. Only the interest portion is deductible, though, so if your $270,000 mortgage has a monthly payment of $1700 but only $500 of that is interest, that $500 is all you can deduct.
For simplicity’s sake, if you are in the 25% tax bracket and all other things are even, your extra $500 interest deduction would result in an additional $125 tax refund to you. That may or may not justify the early payment. If your second mortgage was acquired after you acquired the property then you should definitely prepay that account in 2017 since that deduction is assured to disappear in 2018.
Depending on your situation, you may still be itemizing deductions in the new tax year. Your first mortgage interest up to a balance of $750,000 remains fully deductible in 2018 and going forward. As always, it’s best to consult a tax professional with questions specific to your situation.
About the Author: Greg Williams is an Atlanta-based 15-year veteran of the mortgage industry with significant processing and origination experience as a Branch Manager, Vice President of Residential Mortgages, and Senior Mortgage Banker. He’s a graduate of Wheeler High School in Marietta and received his Bachelor’s Degree in Journalism from the University of Georgia. Greg works with every type of mortgage client, from the first time home buyer to the seasoned real estate investor, all across the state of Georgia.