Your Money, Your Future

Deduction is slashed for new homeowners as part of tax overhaul

Key Points
  • While existing homeowners could continue writing off interest paid on mortgage debt up to $1 million, new mortgages would be subject to a $500,000 cap.
  • With a proposed near-doubling of the standard deduction, fewer taxpayers would benefit from the break for mortgage interest because they would no longer itemize.
Tax reform plan cuts mortgage interest deduction in half

After promising not to touch the mortgage interest deduction, Republican lawmakers are proposing to reduce how much certain taxpayers can deduct.

The Tax Cuts and Jobs Act, unveiled Thursday, would allow current homeowners to continue deducting the interest on mortgage debt up to $1 million. For new purchases, however, that cap would drop to $500,000.

For many taxpayers, the change would matter little. To claim the deduction, you must itemize deductions on your tax return, which only about a third of taxpayers do. Of that one-third, 74 percent take the mortgage interest deduction, according to the Urban-Brookings Tax Policy Center.

Rep. Kevin Brady
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Because the tax bill also includes a near-doubling of the standard deduction, fewer taxpayers would benefit from the mortgage interest deduction whether the cap is lowered or not. Overall, about 21 percent of filers currently use the tax break. That number would drop to about 4 percent with the higher standard deduction, according to estimates from the Tax Policy Center.

For instance, a married couple with the current standard deduction of $12,700 would need their mortgage interest and other deductions to be more than that amount for it to be beneficial to itemize. If the standard deduction for married couples rises to $24,400 as proposed, it would be less likely that they'd meet that threshold — especially given that the tax bill also eliminates other deductions.

Who uses the mortgage interest deduction, by income

Income range* # of filings Total amount
0 to $50,0002.32 million$1.11 billion
$50,000 to $100,0009.77 million$9.19 billion
$100,000 to $200,00014.6 million$24.85 billion
$200,000 & up7.18 million$29.78 billion
Totals:33.87 million$64.93 billion

While the plan includes a provision to allow a continued deductions for state and local property taxes paid, the bill caps that at $10,000.

"The bill eviscerates existing housing tax benefits by drastically reducing the number of home owners who can take advantage of mortgage interest and property tax incentives," said Granger MacDonald, chairman of the National Association of Home Builders, in a statement.

The biggest benefits of the mortgage interest deduction tend to go to higher-income taxpayers. The 7.18 million filers with incomes of $200,000 or more who claim the deduction will reduce their taxable income by an aggregate $29.78 billion this year, according to recent estimates from the congressional Joint Committee on Taxation.

In comparison, the 14.6 million filers with incomes of $100,000 to $200,000 will save less: $24.85 billion. Filers with incomes below that have even smaller tax savings this year.

The legislation also would change how often homeowners can avoid paying taxes on profits from the sale of their home.

Right now, you generally can exclude up to $250,000 in gains ($500,000 for married couples who file a joint tax return) on the sale of your house as long as you haven't used the exclusion in the last two years. The bill changes that to five years.

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