In this article, we will explain how you can reduce your taxable income by correctly deducting your Mortgage Interest. If you obtained your mortgage on or before December 15, 2017, the new tax law doesn’t change the amount of your deductible mortgage interest. This means the old rules still applies to you!!
However, if you got a mortgage (for a first or second home) after December 15, 2017, you can only deduct the interest you paid on the first $750,000 of the debt effective for tax years 2018 through 2025.
Before tax year 2017 (Loan obtained before December 15, 2017)
(1) Only if you itemized your deductions, you could deduct any interest paid on a mortgage to buy, build, or improve your principal home and a second home, if the debt totaled $1 million or less ($500,000 or less if married filing separately).
(2) You were also allowed to deduct interest paid on home equity debt (not used to buy, build, or improve a first or second home) if the debt totaled $1 million or less ($500,000 or less if married filing separately) and totaled no more than the fair market value of your home (reduced by the debt).
Effective Tax Year 2018 and after TCJA (Loan obtained after December 15, 2017)
(1) Only if you itemized your deductions, you can deduct the amount accruing on no more than $750,000 of debt used to buy, build, or improve your principal home and a second home ($375,000 if married filing separately). The debt must be secured by the specific home the debt was used to buy, build, or improve and may not exceed the value of the home.
(2) In addition, the new tax law eliminated the deduction for interest on home equity debt for tax years 2018 through 2025. A home equity loan, home equity line of credit, or second mortgage is not home equity debt if you use the proceeds to buy, build, or improve a first or second home.
The big change here is, if you did not use the proceed to buy, build, or improve a first or second home, you cannot deduct the interest.
Choosing the right and credential tax professional when preparing your taxes will provide you the right advise and peace of mind all year round. We, at Taxville Financial, take a consultative approach to help our clients make informative decisions.
If you have any questions, please do not hesitate to contact us.
Michael Zachary, EA, CPHRC