2018 homeownership tax deductions

This article provided courtesy of 1040.com See their Tax Reform 101 guide for further information on 2018 tax filing.

You don't need us to tell you how special it is to move into your first home—it's the moment house hunters wait and work for, and probably the moment you think of as you look into getting a mortgage. There's a bit more to know about tax reform though—especially due to the Tax Cuts and Jobs Act of 2017 (TCJA).

Deducting your mortgage interest

In tax year 2018, single taxpayers and married couples filing jointly can deduct the interest they pay on up to $750,000 of new mortgage debt; for married couples filing separately, the limit is $375,000. The TCJA reduced these amounts from the respective $1,000,000 limit and $500,000 limit, but the mortgage interest deduction is still a pretty significant tax break.

Now, mortgage loans that started before December 15, 2017 are not being affected by the new, lower deduction limit—at least until 2026. Even if you refinance that debt, you're still good.  

You are also grandfathered into the old limits if you had a written, binding contract by December 15, 2017 to close on a home by January 1, 2018, as long as you purchased by April 1, 2018.  This "grandfathering" of prior commitments is common with tax law changes.

Deducting home equity loan interest

Heads up for another big change: In prior years, you could deduct interest on home equity loans and lines of credit up to $100,000, no matter what you used the loan proceeds for.

Now, the deduction can be claimed if the loan or credit line is used specifically to build, buy, or substantially improve your home—and your total mortgage debt must be under $750K to deduct the entire amount. If your debt exceeds that amount, you can only deduct a percentage of the interest.

For anyone planning their next major home improvement project, a home equity line is still a great option. However, if you're looking to use a home equity line to consolidate debt (car loans, credit card debt, etc.) at a lower interest rate, keep in mind that the tax benefit for that type of borrowing is no longer available.

Deducting mortgage insurance premiums

While this deduction was retroactively extended through 2017, as of now, you won't be able to deduct your mortgage insurance premiums on your 2018 tax return.

Congress could technically extend the deduction again, but that's unlikely; fewer taxpayers will need to claim itemized deductions, since the new standard deduction is so much higher—so there's not a strong case to extend it.

Deducting mortgage points

Think of mortgage points as interest paid on the front end; they are charged before you take out the mortgage but count toward your overall interest. Since points count toward interest, they are also deductible if you itemize. However, the new limit on the mortgage interest deduction applies to points as well. You can see more requirements for point eligibility at the IRS website.