Did you know that the limit on the mortgage interest deduction has been lowered? This happened when the Tax Cut & Jobs Act was passed in 2018. Before this, you could deduct mortgage interest on up to $1 million in mortgage debt. But now, the IRS says the maximum mortgage amount you can claim interest on is $750,000 for first or second homes if the loan was taken after Oct 13, 1987.
You can also deduct interest on $100,000 for a second mortgage loan used for anything other than buying your first or second home. This is called home equity debt. So, you could take a $100,000 home equity line of credit to buy a fancy car or a home theater system, and all the interest is deductible! No wonder so many people took out Home Equity Lines Of Credit (HELOC)!
But here’s a weird thing: the maximum mortgage amount where you can deduct mortgage interest stays at $750,000 even if two people could have $750,000 mortgages each. It doesn’t make sense why the government thinks two people who want to marry with $750,000 mortgages each, don’t deserve to keep their deductions. So, if you can afford such a mortgage, you might want to think about this loss of deduction before you get married. With rates averaging 3.25% in 2020, you could lose out on a lot in interest deductions!
Now, let’s talk about the Mortgage Interest Deduction Limit and Income Phaseout. Back in 2011, if you had an adjusted gross income of over $166,800, your mortgage interest started to get phased out. For every $100 of income over $166,800 you lose $3 of itemized deduction X 33.3% up to a maximum loss of 80 percent of your itemized deductions. It’s a complicated rule, but it’s important to understand.
Here’s an example: Let’s say you make $266,800 and you have $50,000 in mortgage interest deductions. You would take $266,800 – $166,800 = $100,000. Then take $100,000 X 3% = $3,000. Finally, take $3,000 X 33.3% = $999. You can now only deduct $49,001 ($50,000 – $999) from your income instead of originally $50,000.
There are a few questions and conclusions you should consider:
- Why did the government choose $166,800 as the income limit for the start of the phaseout? It’s a bit of a mystery.
- Why do they multiply by 1/3 after multiplying by 3% the income you make over $166,800? It’s a bit complicated, but it’s just how the calculation works.
- Why do tax rules always change? It’s because new politicians come into office and push their own agendas. We need to always be aware of the major tax laws.
- The ideal income for maximum happiness is not far off of $200,000 a year. If you make $200,000, the government won’t persecute you. You will only lose $331 in mortgage interest deduction as your income is $33,200 above the $166,800 phaseout cap. That’s not so bad.
- The government wants you to be a homeowner. They provide up to $850,000 in mortgage indebtedness interest to deduct from your income, which is pretty generous. The median home price is only $340,000.
If you have a mortgage amount above the mortgage interest deduction limit of $750,000, you’ll need to calculate it.
Even though the mortgage interest deduction limit has declined, it’s still an impressive $750,000. Most countries don’t have a mortgage interest deduction to help lower your taxes. For example, Canada and Singapore don’t have this.
Starting in 2016, the phaseout begins with incomes of $254,200 or more and $305,050 for married couples filing jointly. The highest income tax rate is now 39.6% on income over $400,000 as well.
The lower mortgage interest deduction will negatively affect higher priced cities that require bigger mortgages. Therefore, to take advantage, you might want to invest in the heartland of America. Real estate there is cheaper, has higher cap rates, and is benefitting from positive demographic shifts.
You can invest in high potential real estate across the country through real estate crowdfunding. Check out Fundrise and their eREITs, and CrowdStreet if you are an accredited investor and like to invest in individual deals.
Just remember to always do your research and invest a proper asset allocation. There are no guarantees with any investment.
Check the latest mortgage rates online. You’ll get real quotes from pre-vetted, qualified lenders in under three minutes. The more free mortgage rate quotes you can get, the better. This way, you feel confident knowing you’re getting the lowest rate for your situation.
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