Be on the lookout for a white envelope from your bank, mortgage company or lender with a form called 1099-INT. You should see this no later than when the Patriots play in the Super Bowl on February 3rd.
It used to be when filing taxes you would simply give your accountant your 1099-INT form and just about all your interest on a mortgage paid would be deductible as part of your itemized deductions.
That was before the Tax Reform Act of 1986.
Recently the Tax Cuts and Jobs Act (TCJA) represents a significant overhaul to the tax code and while this reform does not eliminate the interest deduction, there are some modifications to be aware of.
Starting in 2018, the interest paid on a mortgage of up to $750,000 in qualified loans can be deducted. This is down from the previous limit of $1,000,000. If you are married and filing a separate return, the new limit is $375,000 down from the previous limit of $500,000.
There are some exceptions and grandfathering rules depending on when the loan was taken out or the home purchase was closed. So this means that some preexisting loans may be grandfathered into the old limits – check with your tax professional.
These new limits or rules are scheduled to last for eight years from 2018 until 2025. What happens after that is anyone’s guess, but things are supposed to go back to pre-2018 rules after 2025.
The good news for Cape Cod residents is that the median selling price on homes here is roughly $483,000** (**CC&I MLS/June 2018). That helps keep everyone under the $750,000 cap.
Another popular loan product is called a Home Equity Line of Credit or HELOC. This is a way to take equity out of a home and can be used for just about anything from making home improvements to paying for college or used for large ticket purchases or emergencies.
Under the new rules, deductibility of Home Equity Interest depends on what the equity was used for. If the equity was used to make improvements to the principle residence it could qualify as a “qualified residence loan” and be deductible. If It was used for personal expenses, it may no longer be deductible.
There are a lot of grey areas on the HELOC piece that you will want to discuss with your tax professional.
If you have enough itemized deductions to exceed your standard deduction, much of this mortgage interest stuff will not apply to you. However, for 2018, the TCJA has increased the standard deduction for married joint-filing couples to $24,000 and $18,000 for heads of households so there will be vast amounts of people who will have to pay attention to these new changes.
The article is for informational purposes only and is not intended to provide advice for tax or accounting purposes. You should consult with your own tax or accounting advisors for advice specific to your individual situation. Contact me if you have any questions. All the best.