New Tax Plan Could Change Mortgage Interest Deduction

mortgage interest deduction

Among many of the changes that the Trump administration plans to make is a change in the mortgage interest deduction. As part of the new tax plan, the mortgage interest deduction could change. If it does, then it could greatly impact those who are buying new homes. Find out everything that you should know about the mortgage interest deduction debate. Then, find out how it can impact you.

What Is a Mortgage Interest Deduction?

When you take out a mortgage on your home, the government allows you to lower your taxable income through a mortgage interest deduction, or MID. The MID lowers a homeowner’s income by the amount of interest she paid on the home loan. For homeowners, this makes a big difference. It allows homeowners to have a bigger budget for the home purchases.

Although you can’t take a deduction on personal loans, home loans are an exception. The US isn’t the only country to have such a policy. In the Netherlands and Switzerland, there is a similar MID. In several other countries, only part of the mortgage works towards a deduction on taxes. Every country has different limitations that relate to this type of deduction.

In the US, there are several limitations to the MID. For one, you need to itemize deductions. The total of your itemized deductions needs to be more than your standard deduction. If not, then your tax would not go down. Additionally, your deduction only applies to interest on debts that are secured by your primary home or secondary home. As a final limitation, you can only deduct interest on the first $1 million of debt.

Who Benefits From the MID?

Any homeowner stands to benefit from the MID. Because you can get a tax deduction for your loan, your home ownership helps your finances. It gives people more incentive to buy a home. This is particularly true for those who have homes that cost under $1 million.

The MID is also good for the real estate market. When people can get a tax deduction for their mortgage payments, they can buy more expensive houses. It makes their budget for buying homes higher.

How Could the MID Change?

Under the new GOP tax plan, mortgage interest deductions could change. Instead of allowing for deductions of up to $1 million, the government would cut that in half. Your new limit for deductions would be $500,000. If the tax plan gets approval, then new homeowners could not claim as much of a deduction for the MID. If you buy a home that requires a high mortgage, then you won’t get a deduction on all of your mortgage payments.

In addition to capping the MID, the government would also cap local and state property taxes. You would only be able to deduct up to $10,000.

Who Does it Affect?

While this affects homeowners in general, it specifically impacts high-income taxpayers. Most taxpayers in the middle and lower brackets can’t afford mortgages of over $500,000. However, those who have higher income are more likely to have higher mortgage debt. If you want to buy a home that requires a mortgage of over $500,000, then you need to consider that it won’t all be tax-deductible. Some of the incentive to buying a high-priced home disappears.

Whether or not the change affects you also depends on your location. For example, those who live in a suburban area might find it easy to get a mortgage under $500,000. If you live in a city, then that could be a challenge. Most city homes come with high price tags. Whether you have a high or a low income, you need a hefty mortgage to afford a home. Of course, some neighborhoods are more expensive than others. It all depends on where you want to buy a property.

For some, the MID change won’t matter. Those who have mortgages under $500,000 won’t notice any change. Or, they might even benefit. The new tax plan has a standard deduction that could give low-cost homeowners a bigger deduction. If people want to buy expensive homes with a high mortgage, then there is no benefit.

The Government Comes Out Victorious

The new tax plan might hurt many prospective homeowners. However, it does benefit the government tremendously. A lower cap on the MID means that the government gives less in tax deductions. As a result, they keep more money. If they completely eliminated the MID, then the government could save billions of dollars on deductions. In 2013, it cost the US government about $70 billion.

In an interesting statement, the Wall Street Journal pointed out that the new MID change would hurt Democrats more than Republicans. Republican counties tend to have a lower income than Democratic counties. For example, New York and California have higher incomes. Therefore, they are likely to have higher home values and higher mortgages. The new tax plan would likely hurt Democrats more than Republicans.

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