2019 Tax Filing Season (2018 Tax Year): The Mortgage Interest Deduction
Updated January 8, 2019
2019 Tax Filing Season (2018 Tax Year): The Mortgage
Interest Deduction
P.L. 115-97, often referred to as “The Tax Cuts and Jobs
send a child to college does not qualify for the mortgage
Act” (the “act” for this In Focus), changed how
interest deduction. The restrictions on the use of home
homeowners can treat mortgage interest for tax purposes
equity loans are irrespective of when the loan was
starting in tax year 2018. While the mortgage interest
originated.
deduction is still generally available, the revision reduced
the maximum mortgage balance eligible for the deduction
After 2025, the mortgage limit for all qualifying mortgage
and restricted the deduction for interest associated with
interest will be $1 million, plus $100,000 in home equity
home equity loans. The law also increased the standard
indebtedness regardless of its use.
deduction, which will reduce how many homeowners claim
the itemized deduction for mortgage interest. This In Focus
Comparison to Prior Law
explains the changes made to the mortgage interest
Under prior law, a homeowner was allowed an itemized
deduction by the act and discusses the potential impact of
deduction for the interest paid on the first $1 million of
the changes.
combined mortgage debt associated with a primary or
secondary residence. As with current law, a homeowner
Summary of Current Law
could deduct a percentage of interest paid if the mortgage
A taxpayer may claim an itemized deduction for “qualified
balance exceeded the $1 million limit. Additionally, a
residence interest,” which includes interest paid on a
homeowner was allowed to deduct the interest on the first
mortgage secured by a principal residence and a second
$100,000 of home equity debt regardless of whether or not
residence. The amount of interest that is deductible depends
the taxpayer incurred the debt to finance costs associated
on when the mortgage debt was incurred. For mortgage
with the home. For example, under prior law, a homeowner
debt incurred on or before December 15, 2017, the
could use a home equity loan to purchase a boat, pay for a
combined mortgage limit is $1 million ($500,000 for
child’s college, cover medical costs, or any number of other
married filing separately). For mortgage debt incurred after
things not involving the property that secured the loan and
December 15, 2017, the deduction is limited to the interest
still deduct the associated interest.
incurred on the first $750,000 ($375,000 for married filing
separately) of combined mortgage debt. These limitations
Economic and Budgetary Impact of the
apply for taxable years 2018 through 2025.
Change
While the reduced applicable mortgage limit will decrease
If a taxpayer has mortgage debt exceeding the applicable
the amount of interest that is deducted, the reduction itself
mortgage limit ($750,000 or $1 million), he or she may still
will likely not have a significant impact on the number of
claim a deduction for a percentage of interest paid. The
homeowners claiming the deduction. However, other
percentage of interest that is deductible is equal to the
changes enacted by the act are expected to reduce the
applicable mortgage limit divided by the remaining
itemization rate generally, and will therefore reduce the
mortgage balance. For example, a homeowner whose
number of homeowners claiming the mortgage interest
mortgage was originated after December 15, 2017, and has
deduction. Specifically, the near doubling of the standard
a balance of $1 million could deduct 75% ($750,000
deduction and the $10,000 limit placed on the deduction for
divided by $1 million) of their interest payments.
state and local income taxes (SALT) is expected to reduce
the overall itemization rate from its historical average of
Mortgage debt resulting from a refinance is treated as
approximately 30% to around 10%. Because one must
having been incurred on the origination date of the original
itemize to claim the mortgage interest deduction, fewer
mortgage for purposes of determining which mortgage limit
homeowners are expected to benefit from the deduction.
applies ($750,000 or $1 million). The balance of the new
loan resulting from the refinance, however, may not exceed
The reduction in the itemization rate and the fact that
the balance of the original loan.
higher-income homeowners on average have larger
mortgage balances means that the benefits of the mortgage
For purposes of the deduction, mortgage debt includes
interest deduction will disproportionately accrue to
home equity loans secured by a principal or second
taxpayers in the upper end of the income distribution, and
residence that are used to buy, build, or substantially
more disproportionately than under prior law. This does not
improve a taxpayer’s home. Mortgage debt does not include
necessarily mean that homeowners who no longer claim the
home equity loans the proceeds of which are used for
mortgage interest deduction will pay higher taxes, since the
purposes unrelated to the property securing the loan. For
standard deduction and other changes enacted by the act
example, interest associated with a home equity loan that is
may more than compensate for the loss of the deduction.
used to pay off a credit card balance, go on a vacation, or
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2019 Tax Filing Season (2018 Tax Year): The Mortgage Interest Deduction
It may be important to note that before the act, slightly less
Limiting the mortgage interest deduction is expected to
than half of homeowners claimed the mortgage interest
increase federal tax revenues through 2025. However, the
deduction. Some homeowners have no mortgage, and hence
Joint Committee on Taxation’s (JCT’s) revenue estimates
no interest to deduct. Others claimed the standard deduction
do not isolate the revenue effects stemming from the
because they were either toward the end of their mortgage
changes to the mortgage interest deduction. Estimates
repayment period and interest payments were a small
published while the act was being considered, and more
proportion of their total mortgage payment, they lived in a
recent line-item tax expenditure estimates, reflect not only
state with low state and local taxes, or they lived in a low-
the temporary reduction in the combined mortgage amount,
cost area and therefore had relatively small mortgages.
but also the revenue effects from increasing the standard
deduction and modifying a number of other itemized
While it is expected that fewer homeowners will benefit
deductions, which is expected to significantly reduce the
from the deduction under current law, the effect on the
itemization rate. Given the important interactions between
homeownership rate will likely be small. The economic
the mortgage interest deduction and other features of the tax
literature has generally found that the structure of deduction
code, the deduction is estimated to produce a revenue loss
prior to the act did little to promote homeownership. This is
of $33.7 billion in 2018 compared to a revenue loss of
because the deduction was not well targeted to the largest
$66.4 billion in 2017 under prior law.
barriers to homeownership—the down payment required by
banks and closing costs. Since the act did not change the
The revenue gains resulting from the act will be reversed
deduction’s structure, the analysis of the deduction’s effect
after 2025 as the mortgage interest deduction, the standard
on homeownership remains unchanged. Where the changes
deduction, and other itemized deductions revert to their
could show up is in slightly lower home values, as the
2017 parametrizations, barring further congressional action.
literature suggests that the deduction is partly capitalized
into home prices.
Mark P. Keightley, Specialist in Economics
IF11063
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2019 Tax Filing Season (2018 Tax Year): The Mortgage Interest Deduction
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