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Under Trump tax plan, would you still deduct mortgage interest?

By Holden Lewis · Bankrate.com
Wednesday, April 26, 2017
Posted: 2 pm ET

President Donald Trump makes a speech

The mortgage interest deduction would survive under President Donald Trump's tax reform plan. But fewer homeowners would use it.

The reason is that the standard deduction would be almost doubled, leaving the mortgage interest deduction only for homeowners who pay the most interest. Those are the people with the biggest home loans.

What you can do

Tax reform will take a long, convoluted path through Congress. Any bill that is signed into law will differ from what was proposed originally. If the expanded standard deduction makes it through, you'll probably pay less taxes overall, but without using the mortgage interest deduction. Steps to take:

  • If you plan to buy your first home within a few years, consider saving up for a bigger down payment. If you're not going to deduct your mortgage interest, you will benefit from having a smaller mortgage and thus paying less interest.
  • If you own a home, consider getting a home equity line of credit before tax reform passes. Your home's value could fall in the future, reducing the equity to borrow from. So you might be able to get a bigger credit line now than you will after tax reform is passed.
  • If you file jointly and deduct more than $24,000 a year, cheer up -- you might get to keep deducting mortgage interest, depending on the details of the tax reform that's eventually passed. Shop for a jumbo mortgage if you're a big earner.

A simpler tax code?

The fate of the mortgage interest deduction will be debated this spring and summer as Congress and the president wrestle with tax reform.

Treasury Secretary Steve Mnuchin presented the outline -- "a broad-brush view," he said -- of a tax plan that would retain the mortgage interest deduction, but decrease the number of homeowners who would take it. Most homeowners would see a reduction in their tax bill, even without deducting mortgage interest, handing them more money to put into savings.

All about the deductions

For middle-class homeowners, the main points of the Trump administration's proposal are:

  • A reduction in the number of tax brackets, from seven to three.
  • Tax brackets of 10 percent, 25 percent and 35 percent.
  • Elimination of the deduction for state and local income taxes.
  • A big increase in the standard deduction, to $24,000 for joint filers from the current $12,600. Single filers would have a $12,000 standard deduction, up from $6,300.

That last item, the bigger standard deduction, would mean that millions of homeowners would stop using the mortgage interest deduction. In return, they would end up in lower tax brackets, resulting in savings.

Fewer would itemize

Fewer people would use the mortgage interest deduction because of the way itemization works. You file Schedule A when total itemized deductions exceed the standard deduction. For example, if a single taxpayer's mortgage interest and charitable contributions totaled $10,000 in 2016, he or she itemized -- because those costs exceeded the $6,300 standard deduction. Bring on Schedule A!

But if the standard deduction were raised to $12,000 for the same taxpayer, he or she would claim the standard deduction because that's more than the $10,000 in mortgage interest and charitable contributions.

Trump campaigned on a plan to increase the standard deduction even more -- to $30,000 for joint filers and $15,000 for singles. The nonpartisan Urban-Brookings Tax Policy Center estimated that that plan would have reduced itemizers by 60 percent, from 45 million to 18 million. "Even under current law, about three-quarters of tax filers take the standard deduction and would be exempt from a cap on itemized deductions," writes the center's Howard Gleckman.

Lower home values

Home values could fall in response to a lessening of the value of the mortgage interest deduction. In a paper published last year, Federal Reserve economist David E. Rappoport calculated that house prices would fall an average of 6.9 percent if the mortgage interest deduction were eliminated.

Rappoport didn't estimate the effect on home values if the mortgage interest deduction were to remain, but useful to fewer people. He did point out that a drop in house prices would allow first-time homebuyers to pay less for their homes. That could mean more people could afford to buy homes and get mortgages.

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9 Comments
Ricki
May 25, 2017 at 10:58 am

I meant to write "We are NOT getting "such a large increase in the standard deduction".

Ricki
May 25, 2017 at 10:56 am

The tax plan also doesn't recognize that there are some singles that own homes, pay mortgages, property taxes. We are getting such a large increase in the standard deduction. Losing those itemized deductions plus a personal exemption means that my taxes will go up. And I'm NOT rich, just a homeowner. Not everyone is married.

Joe
May 22, 2017 at 9:56 pm

I agree with eliminating mortgage interest deduction. In the short term, it may decrease home values. However, in the long term it will stabilize the housing market by discouraging people from borrowing more than they can safely afford. Why not borrow an extra $50K knowing that Uncle Sam will give you the interest back on tax return?

Eliminating this loophole will discourage foolish lending and greedy real estate agents from creating bidding wars on properties, especially in expensive states like CA.

Ashbur
May 18, 2017 at 9:47 am

The SD in campaign started at 50k. Then 30k, now theyre saying 25k. Preaching that it is "doubling the standard deduction" but with personal exemptions eliminated, and the 3 tier idea, the tax code would be undeniably unfair. Without the exemptions a married couples SD will virtually increase by about 5k. Thats it. If they have 2 kids, that SD is actually less now and they will pay more. Especially if say grandma is retired, on SS and keeps the kids. Also say the couple usually deducts 23k in itemized deductions, 2 kids, so total deduction is 39 to 40k. Now with the new proposed law, that will penalize them with about 10k in lost deductions. A far cry from the 10k increase deductions they would have received based on what Trump vowed to do. Talk is cheap... This one size fits all mind set is a disaster. Simple isnt always better. People base and livlihoods living pay check to pay check on the current system and overhauling the current system while ignoring the public is a recipe for disaster. Atlas shrugged scale disaster. No Atlantis to run to.

JAM
May 02, 2017 at 10:25 am

When is HARP 3.0 coming out for us that are still underwater because of all the greed back in 2005 they bailed all the banks out didn't they !!!!!!!!!

Gregg
April 28, 2017 at 1:25 am

I do not believe that house prices will be affected at all if interest is no longer deducted. I have been selling homes for 20 years and I don't know of anyone who bought because they can deduct the interest. Many of these articles criticizing tax cuts are political in nature.

Ray Anderson
April 27, 2017 at 9:45 pm

Home values would go down because people buy the payment they can afford. MID reduces the net affordable payment after the interest deduction essentially subsidizing the higher price. Therefor market forces will reduce the home price they can consider. MID has never helped the low end buyer because of the standard deduction. It only helps the buyers who can afford higher mortgages.

The real estate industry earns more compensation on the higher, subsidized home prices and benefits from the MID.

Asher
April 27, 2017 at 7:19 pm

Who can please please explain to me why value of home can go down if one can not deduct interest

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