{"id":13343,"date":"2019-12-27T13:07:02","date_gmt":"2019-12-27T21:07:02","guid":{"rendered":"https:\/\/www.homelight.com\/blog\/?p=13343"},"modified":"2021-12-15T14:53:14","modified_gmt":"2021-12-15T22:53:14","slug":"buyer-mortgage-interest-deduction-2019","status":"publish","type":"post","link":"https:\/\/www.homelight.com\/blog\/buyer-mortgage-interest-deduction-2019\/","title":{"rendered":"What You Need to Know About the 2019 Mortgage Interest Deduction"},"content":{"rendered":"

DISCLAIMER:<\/strong>\u00a0As a friendly reminder,\u00a0this blog post is meant to be used for educational purposes only, not legal or tax advice. If you need help determining the taxes on your home sale, please consult a skilled tax professional.<\/em><\/p>\n

If you\u2019re a homeowner who paid taxes last year, then you likely already know about mortgage deduction changes under the new tax law. But it\u2019s almost tax time \u2014\u00a0again \u2014 so it might be time for a little refresher.<\/p>\n

Check out this primer on the 2019 mortgage interest<\/a> deduction with expert tips\u2026 and make sure you\u2019re ready with all the info you need to know so you don\u2019t make any mistakes, and so you get back all the money you\u2019re entitled to \u2014 fast.<\/p>\n

\"A<\/a>
Source: (Ben Mullins\/ Unsplash)<\/figcaption><\/figure>\n

The basics: What is a tax deduction?<\/h2>\n

A tax deduction is a deduction across any category that lowers your taxable income<\/a>, and as a result lowers your tax liability \u2014 or the amount you owe at tax time. Deductions are usually expenses<\/a> that you incur throughout the year that you can rightfully subtract from your total income to determine how much you owe in taxes.<\/p>\n

What\u2019s the mortgage interest deduction?<\/h3>\n

The mortgage interest deduction<\/a> is a tax deduction you can take for mortgage interest paid on the first $1 million of mortgage debt during that tax year. Homeowners who bought houses after December 15, 2017 can deduct interest on the first $750,000 of the mortgage. This doesn\u2019t include the principal payment or your insurance. (FYI, property taxes up to a certain amount are deductible<\/a>, too.)<\/p>\n

Qualified property types include a house, condominium, co-op, mobile home, house trailer, boat, \u201cor similar property that has sleeping, cooking, and toilet facilities,\u201d according to the home mortgage interest deduction tax code<\/a>.<\/p>\n

To claim this deduction, you must itemize your tax return.<\/p>\n

How do I itemize my return to claim the home mortgage interest deduction?<\/h2>\n

\u201cItemizing basically means listing out your deductible expenses, and taxpayers have to choose between itemizing and claiming the standard deduction,\u201d says NerdWallet tax specialist Andrea Coombes.<\/p>\n

Consider that the standard deduction for 2019 is $12,200 for single filers and $24,400 for those who are married<\/a> and file jointly. That means your combined deductible expenses, including things like property taxes up to $10,000, mortgage interest, charitable contributions plus some other expenses, would have to exceed $12,200 for singles and $24,400 for married couples for it to make sense to itemize.<\/p>\n

\u201cFor example, say you\u2019re single and you paid property taxes of $3,000 and mortgage interest of $15,000 on a mortgage loan of $365,000 in 2019. You can use that $18,000 of property taxes and mortgage interest as a deduction, to reduce your taxable income and thus trim your overall tax bill,\u201d Coombes explains.<\/p>\n

\u201cNow, if you\u2019re married and in the same situation \u2014 $3,000 in property taxes and $15,000 in mortgage interest \u2014 you\u2019re better off taking the standard deduction, unless you have other deductible expenses that add up to more than the $24,400 standard deduction amount for married couples.\u201d<\/p>\n

A word to the wise, suggests Gregory Brown<\/a>, a top-selling agent with Century 21 Bradley based in Fort Wayne, Indiana:<\/p>\n

\u201cIf you don\u2019t have enough itemized deductions, then you\u2019re better off just taking the blanket standard deduction. I strongly recommend at least talking to a tax professional. You can interview accountants for free.<\/p><\/blockquote>\n

\u201cAnd when you\u2019re getting into homeownership, and you\u2019re donating to charity, then you\u2019ve got your kids\u2019 529 accounts for college, and you\u2019re doing a Roth IRA, you really need to be talking to a professional because there are so many different pieces to the puzzle<\/a>.\u201d<\/p>\n

Noting that basic tax preparation might cost around $1,000, Brown says: \u201cThe money you can save for talking to one of those guys \u2014\u00a0you\u2019re going to make that up.\u201d<\/p>\n

\"A<\/a>
Source: (Toa Heftiba\/ Unsplash)<\/figcaption><\/figure>\n

How does the mortgage interest deduction work in the real world?<\/h2>\n

You can now deduct interest on the first $1 million of your mortgage, or $750,000 for homes bought after December 15, 2017. But because most homes around the country cost less than $750,000 (according to Census data<\/a>), the number of homeowners actually affected by the change is pretty small.<\/p>\n

Also, consider that your biggest interest deduction will come in your first year of homeownership, and your deductions will get smaller every year after that.<\/p>\n

Here\u2019s how \u2014\u00a0and why \u2014 that works: Every mortgage loan amortizes. Over time, the payment amount stays the same, but as you go, it consists of less interest and more principal than the payment before.<\/p>\n

\u201cIn the first years of a mortgage loan, the reduction of the interest payments is gradual,\u201d according to NerdWallet\u2019s Coombes. \u201cThat is, the value of the mortgage interest<\/a> deduction does fall over time, but there’s not much of an effect in the first few years of the loan.\u201d<\/p>\n

Let\u2019s use BankRate\u2019s amortization calculator<\/a> to give some real-life examples of how much somebody who closed on a house in January could expect to deduct. Let\u2019s say you took out a $250,000 mortgage, getting a conventional 30-year fixed loan at a rate of 4.625%. With a monthly payment around $836, you\u2019d pay about $7,371 in interest in this first year \u2014\u00a0that\u2019s your deduction.<\/p>\n

For next year, you\u2019d be looking at a deduction of $7,248\u2026 and so on over time, with deductions continuing to shrink.<\/p>\n

Now let\u2019s say you took out a $600,000 mortgage in January, with the same terms. With a monthly payment around $3,085, you\u2019d pay about $27,551 in interest in this first year. For next year, you\u2019re looking at a deduction of $24,847.<\/p>\n

Tax implications aside, there\u2019s major satisfaction in paying on a mortgage loan over time, and watching your equity bloom as your payments shift from heavier on the interest to heavier on the principal.<\/p>\n

\u201cWhen you look at those amortization scales, for every $100,000 you\u2019re increasing about $1,000 to $1,500 a year, and then that adds on to the back end. So after the first year, you get $1,000 to $1,500, then you\u2019re around $3,500, then you\u2019re around $6,000,\u201d Brown estimates.<\/p>\n

\u201cSo it really starts to snowball even though your payment is staying the same. More and more of that payment that is going toward paying off your mortgage and not just interest. That\u2019s the beauty of it.\u201d<\/p>\n

(Yes, even if your tax benefit fades!)<\/p>\n

Header Image Source: (Sarah Pflug\/<\/a>\u00a0Burst<\/a>)<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"

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