As 2019 is coming to a close, most of us turn our attention to end-of-the-year festivities. Along with great food and joyous time with friends and family, the end of the year also means taxes. Because nothing says “party” like talking tax law and mortgage interest deductions.
So as you embark on the holiday season, you are probably eagerly anticipating tax time right around the corner. No? Just us?
Regardless, if you are a homeowner or are considering buying a house, it’s essential to have accurate information about the tax benefits. It is especially crucial to understand how your mortgage interest factors into taxes.
Every year it is important to get your ducks in a row to make sure you are prepared for the annual rite of taxation. Part of that preparation includes becoming knowledgeable about what you can deduct and what you cannot.
And to add a little spice to the meatball this year, the Tax Cuts and Jobs Act (TCJA) kicks in. This tax reform bill arrived on the scene in 2018, but it did not kick in to affect tax returns until this year.
The TwinCity Lending team is here and ready to help you become a homeowner so that you can take advantage of the associated tax perks. Reach out today to ask questions or start a loan application. You’ll be in the home of your dreams in no time.
Tax Reform Misconception
In addition to changes in tax brackets, tax rates, family benefits, and standard deductions, there is a change in the mortgage interest deduction. Unfortunately, many homeowners mistakenly think that this tax break disappeared with the new law.
There has been a lot of uproar over this supposed elimination of the deduction. But it didn’t go anywhere. It just changed. If you are a homeowner, it is likely you still qualify for this deduction. But first, let’s review and clarify what your mortgage interest is.
What Is Mortgage Interest?
Mortgage interest is the amount of money you pay for the privilege of borrowing the money needed to buy a home. When you fill out a loan application and seek preapproval for a home loan, the lender will tell you what interest rate you will pay to borrow the money. This rate works just like the interest on any other credit card, student loan, or car loan. But mortgage interest rates are generally much lower than others. This amount will be part of your mortgage payment each month.
Your monthly payment will generally cover the following obligations:
- Principal loan amount
- Interest charges
- Mortgage insurance, if required
- Homeowner’s insurance, if not paid separately
- Property taxes, if not paid separately
Historically, those who own homes have been able to include the amount they pay in mortgage interest in their itemized deductions on tax returns. This tax benefit lowers the person’s taxable income, potentially saving them money.
Did the Mortgage Interest Deduction Disappear?
No, it did not go away. It’s still there, and most homeowners can take advantage of it.
Under the old law, homeowners could deduct the mortgage interest on a principal loan amount of up to $1 million. They also could deduct interest on home equity loans of up to $100,000. These deductions applied to primary residences or second homes.
So what changed? Taxpayers who are married and filing jointly now may deduct the mortgage interest on loan amounts of up to $750,000. The number is $350,000 for individuals. So although it is different now, the mortgage interest deduction is still around. And many people can benefit from it.
There is even more good news. If you acquired your mortgage before December 16, 2017, the old limits apply to you. So it is not all gloom and doom, as you may have heard. Securing a home loan and buying real estate is still a worthwhile financial goal.
Can I Still Deduct the Interest on Home Equity Debt?
This question doesn’t have as clear-cut of an answer. The tax bill removed the home equity interest deduction in some circumstances.
Specifically, to deduct this interest now, a homeowner must use the loan to buy, build, or make large-scale improvements to their primary or secondary residences.
The new tax law changes keep valuable tax deductions within reach of most homeowners. The majority of home loans qualify the taxpayer to claim the mortgage interest deduction.
And a home equity loan or line of credit remains a great option to pay for big-ticket items. It can make it possible to get a new roof, a kitchen remodel, or an awesome second home.
And even if you need to use home equity for other needs, such as debt consolidation, it can still be a smart idea to do so. The interest rate for HELOC options typically is much lower than the rate on credit cards and other consumer debt. So it can be a worthwhile plan, even if you can’t deduct the interest. TwinCity Lending can help you get this started.
Is Homeownership Still the Right Choice?
Buying real estate is absolutely the right move when it comes to building long-term wealth. Even with the tax reform changes, most homeowners will be able to deduct their mortgage interest.
Any time there are sweeping changes to tax laws, misconceptions and myths can make the rounds. But the new bill does not eliminate the mortgage interest benefit as some do believe. This long-standing deduction has helped homeowners for decades, and that isn’t changing.
TwinCity Lending Is On Your Side
Regardless of how the new tax rules affect you, the experts at TwinCity Lending are here to help you through the home loan process. We are a concierge mortgage broker team, and our experience and training have us ready to answer all of your home loan questions.
Whether you are just getting started as a home buyer or want to add to your existing real estate portfolio, we have you covered. We offer competitive mortgage interest rates and can help you with programs for veterans, first-time buyers, and more.
Reach out today and let our experienced staff make your dreams of homeownership a reality.