The mortgage interest deduction can be a benefit for tax purposes for many homeowners. It allows taxpayers to deduct the interest paid on a mortgage used to buy, build, or improve a home, reducing their taxable income. Unfortunately, the mortgage interest deduction (MID) and its associated tax benefits are not as advantageous for some homeowners as they used to be. Several changes, particularly those brought by the Tax Cuts and Jobs Act (TCJA) of 2017, have reduced its impact. Here’s why:
1. Increased Standard Deduction
- Before 2018, many taxpayers itemized deductions, including the mortgage interest deduction, because the standard deduction was lower.
- After the TCJA, the standard deduction nearly doubled:
- 2024 Standard Deduction: $13,850 (single), $27,700 (married filing jointly).
- As a result, fewer people benefit from itemizing deductions, including the MID, because the standard deduction is often higher than the total itemized deductions.
2. Reduced Loan Limits
- The TCJA reduced the amount of mortgage debt eligible for interest deduction:
- For mortgages originated after December 15, 2017, the deductible interest is limited to loans up to $750,000 ($375,000 if married filing separately).
- For mortgages originated before that date, the limit remains $1 million ($500,000 if married filing separately).
- This change primarily affects homeowners in higher-cost housing markets or those with large mortgages.
3. State and Local Tax (SALT) Deduction Cap
- The TCJA capped the state and local tax (SALT) deduction at $10,000 ($5,000 for married filing separately).
- In the past, taxpayers in high-tax states could combine large SALT deductions with mortgage interest deductions to exceed the standard deduction.
- The SALT cap has made it harder to reach a level of itemized deductions that surpass the standard deduction.
4. Alternative Minimum Tax (AMT)
- Some high-income taxpayers are subject to the AMT, which may limit or eliminate the benefits of the mortgage interest deduction.
Net Impact
- Fewer Taxpayers Itemize: The Urban-Brookings Tax Policy Center estimated that after the TCJA, the percentage of taxpayers itemizing dropped significantly, reducing the number of households benefiting from the MID.
- High-Income Homeowners Benefit More: The deduction remains more valuable for individuals with higher incomes and expensive homes, as they are more likely to itemize and exceed the standard deduction.
Does It Still Have Value?
Yes, for those with larger mortgages or higher itemized deductions, the MID can still result in meaningful tax savings. However, its value has diminished for many middle-income taxpayers due to the higher standard deduction and other limitations.
If you’re unsure whether the mortgage interest deduction benefits you, consulting a tax professional or running a comparison of itemized vs. standard deductions is a good idea.