You Probably Can’t Get the Mortgage Interest Tax Deduction, So Why Should Anyone Else?

Photo by Evan Dvorkin on Unsplash

One of the changes in the 2017 tax bill was to double the standard deduction from $6,700 per person to $12,000. This had the effect of changing the number of people who itemize their tax returns from nearly a third of all taxpayers to less than 10 percent. This means that nearly 20 percent of taxpayers no longer have the advantage of using the mortgage interest deduction and getting a tax deduction for the interest they pay on their home mortgage. To be fair, the 10 percent of taxpayers who are still itemizing are almost all taking advantage this tax deduction, but why should they be getting this tax advantage? The 10 percent who still use it are mostly wealthy people who would be able to afford the house anyway and the tax deduction surely played no part in deciding if they were going to buy a house. So why didn’t Congress just eliminate this deduction in 2017? They feared the housing lobby.

You have to purchase a fairly expensive home to qualify for the mortgage interest deduction. If you and a spouse purchase a $500,000 home and get a loan with 4 percent interest, you’ll be paying $20,000 in yearly interest. Assuming that is your only itemized deduction, this is still not enough to get above the $24,000 standard deduction for a couple filing jointly. This is why the majority of people who are still able to take this tax deduction are mostly purchasing homes above $500,000 and most of them are in cities that have a high cost of living. But the new law also capped the deduction to the first $750,000 of a mortgage. This means you could be super rich and get a $1.5 million-dollar mortgage, but would only be able to deduct half of your mortgage interest. But let’s say you purchased a home for exactly $750,000 with a mortgage rate of 4.25 percent, you would be able to deduct $31,875 — which is $7,875 more than the standard deduction for a couple and $19,875 for an individual. The mortgage interest tax deduction is still a good deal for that hypothetical couple or person. I will also admit that fewer people qualify because mortgage interest rates are low right now; however, that doesn’t look like it will change in the immediate future. If rates do start going up it would lead to a slight uptick in the number of people who qualify, but even if rates went up a percent or two it wouldn’t lead to that many more people taking the deduction.

When factoring in what kind of home to purchase you should be careful when counting on the mortgage interest deduction as being a benefit. You’ll have to buy a fairly expensive home to make it into the 9 percent of tax filers who are still eligible post the 2017 tax reform. Realtors and home builders often try to advertise the mortgage interest deduction as a benefit to home ownership, but this benefit has actually led to an increase in the costs of homes. I personally think that home prices and mortgages should be something that people are cautious about, it’s often a mistake to stretch for the biggest mortgage you can afford. (I wrote a different Medium post here about why I believe it’s better to get a mortgage slightly smaller than you qualify for.)

The recent changes made the tax benefit for mortgage interest virtually only available to wealthy home buyers, who aren’t the ones we should be helping get more affordable housing. So why didn’t Congress just eliminate it? For one, even if only 1/10 people can now take advantage of this tax benefit, the realtors and home-builders fought hard to make sure it wasn’t eliminated in tax reform. This is because the houses that are above $500,000 are more profitable to build and sell than cheaper homes and the tax benefit might help convince people to make the jump into a bigger home.

Secondly, almost all the components on the individual side of the tax law expire at the end of 2025. Like the Cinderella story, when the clock strikes midnight on December 31, 2025, the fancy new tax code is going to unravel. But perhaps the new tax law is more like Back to the Future, we’ll go to sleep in the year 2025, but when we wake up and look at our tax bills it will appear that it’s 2017. The standard deduction will go back to $6,700 from $12,000 and the tax brackets will all go up back up a few percent. All that is to say that if Congress doesn’t pass a tax bill between now and then the number of people who will be itemizing their tax bills will be right back to 1/3 of all taxpayers, if not higher because the tax bill is actually slowly raising everyone’s taxes (I wrote a Medium post about that dirty trick here).

However, you should not be planning you taxes for 2026. For now, beware that you probably don’t qualify for the mortgage interest tax deduction and if you do the benefit will be far less than it was a few years ago. In all reality the best-case scenario is that Congress eliminates the tax deduction altogether and puts the tax savings towards building more affordable housing because it’s hard to see what benefit the country gets by incentivizing people to purchase homes between $500,000 and $750,000. Sadly, I am not holding my breath for that to happen.

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