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1 1 (May 07, 2020)

handle is hein.crs/govdacf0001 and id is 1 raw text is: The Mortgage Interest Deduction May 7, 2020 The mortgage interest deduction is of interest to policymakers due to its association with homeownership. The mortgage interest deduction is also of interest because it is one of the largest tax benefits available to homeowners in terms of forgone federal tax revenue. For 2020, the Joint Committee on Taxation (JCT) estimates that the deduction will reduce revenues by $30.2 billion. The only larger housing-related tax expenditure is the exclusion for capital gains on the sale of a principal residence at a revenue cost of $35.9 billion in 2020. This In Focus provides a brief overview of the mortgage interest deduction. P.L. 115-97, often referred to as the Tax Cuts and Jobs Act (TCJA), changed the tax treatment of mortgage interest starting in tax year 2018. Although the mortgage interest deduction is still generally available, TCJA reduced the maximum mortgage balance eligible for the deduction and restricted the deduction of interest associated with home equity loans. TCJA also increased the standard deduction, which reduced the number of taxpayers who claim itemized deductions generally, including for mortgage interest. I~ of may C u rrent Law A taxpayer may claim an itemized deduction for qualified residence interest, which includes interest paid on a mortgage secured by a principal residence and a second residence. The amount of interest that is deductible depends on when the mortgage debt was incurred. For mortgage debt incurred on or before December 15, 2017, the combined mortgage limit is $1 million ($500,000 for married filing separately). For mortgage debt incurred after December 15, 2017, the deduction is limited to the interest incurred on the first $750,000 ($375,000 for married filing separately) of combined mortgage debt. If a taxpayer has mortgage debt exceeding the applicable mortgage limit ($750,000 or $1 million), he or she may still claim a deduction for a percentage of interest paid equal to the applicable mortgage limit divided by the remaining mortgage balance. For example, a homeowner whose mortgage was originated after December 15, 2017, and has a balance of $1 million could deduct 75% ($750,000 divided by $1 million) of the interest payments. Refinanced mortgage debt is treated as having been incurred on the origination date of the original mortgage for purposes of determining which mortgage limit applies ($750,000 or $1 million). The balance of the new loan resulting from the refinance, however, may not exceed the balance of the original loan. This may occur, for example, when a homeowner cashes out equity in the home by obtaining a larger loan than is necessary to pay off the current mortgage balance. For purposes of the deduction, mortgage debt includes home equity loans secured by a principal or second residence that are used to buy, build, or substantially improve a taxpayer's home. Mortgage debt does not include home equity loans when the proceeds are used for purposes unrelated to the property securing the loan. For example, interest associated with a home equity loan that is used to pay off a credit card balance, go on a vacation, or send a child to college does not qualify for the mortgage interest deduction. The restrictions on the use of home equity loans apply irrespective of when the loan was originated. After 2025, the mortgage interest deduction will revert to the law that existed prior to TCJA. Cor,--,,naisiom tio Prim- Lw Under prior law, a homeowner was allowed an itemized deduction for the interest paid on the first $1 million of combined mortgage debt associated with a primary or secondary residence. As with current law, a homeowner could deduct a percentage of interest paid if the mortgage balance exceeded the $1 million limit. Additionally, a homeowner was allowed to deduct the interest on the first $100,000 of home equity debt regardless of whether or not the taxpayer incurred the debt to finance costs associated with the home. For example, under prior law, a homeowner could use a home equity loan to purchase a boat, pay for a child's college, cover medical costs, or any number of other things not involving the property that secured the loan and still deduct the associated interest. knpact of C The reduced mortgage limits under TCJA decrease the amount of interest that would otherwise be deducted under prior law, though the reduction itselfwill likely not have a significant impact on the number of homeowners claiming the deduction. However, other changes enacted by TCJA, specifically the near doubling of the standard deduction and the $10,000 limit placed on the deduction for state and local income taxes (SALT), are estimated to have reduced the itemization rate generally, and will therefore reduce the number of homeowners claiming the mortgage interest deduction. Shortly after enactment, the Tax Policy Center estimated that TCJA would reduce the overall itemization rate from 26.4% of taxpayers to 10.9%. Because taxpayers must itemize to claim the mortgage interest deduction, fewer homeowners now benefit from the deduction. The lower itemization rate and the fact that higher-income homeowners have larger mortgage balances on average means that the benefits of the mortgage interest deduction disproportionately accrue to taxpayers at the upper end of N,, ',Ngwq ppmmp mgmmmgo 10 VO ILU

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