Mortgage Interest Deduction: How It Works in 2022

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The number of taxpayers claiming mortgage interest deductions on Schedule A has dropped sharply since the 2017 tax overhaul enacted both direct and indirect curbs on them. For 2019, about 13 million filers claimed the deduction vs. about 33 million for 2017, according to the latest IRS data.

A key reason for the change: Millions more filers are claiming the expanded standard deduction rather than itemizing write-offs separately on Schedule A. For example, a married couple won’t benefit from itemizing if their mortgage interest, state and local taxes and charitable contributions total less than their standard deduction amount of $25,100 for 2021 or $25,900 for 2022.

In addition, Congress in 2017 imposed new limits on the amount of mortgage debt that new purchasers can deduct interest on.

Limits on eligible mortgage debt

Limits apply for taxpayers taking mortgage-interest deductions, and they are more generous for homeowners with older mortgages.

Homeowners with existing mortgages taken out on or before Dec. 15, 2017 can continue to deduct interest on a total of $1 million of debt for a first and second home. For mortgages issued after Dec. 15, 2017, homeowners can deduct interest on a total of $750,000 of debt for a first and second home. These limits aren’t indexed for inflation.

Here’s an example. If John had a $750,000 mortgage on a first home and a $200,000 mortgage on a second home as of Dec. 15, 2017, he can continue to deduct the interest on both loans on Schedule A. But if he bought one home with a $750,000 mortgage in 2015 and then bought a second home with a $200,000 mortgage in 2020, he can’t deduct the interest on the second loan.

Mortgage Refinancing

Homeowners can refinance mortgage debt up to $1 million that existed on Dec. 15, 2017 and still deduct the interest. But often the new loan can’t exceed the amount of the mortgage being refinanced.

Here’s an example provided by Evan Liddiard, a CPA with the National Association of Realtors: If Emily has a $1 million mortgage she has paid down to $800,000, she can refinance up to $800,000 of debt and continue to deduct interest on it. If she refinances for $900,000 and uses $100,000 of it to make substantial improvements to the home, she could deduct the interest on $900,000, according to Mr. Liddiard.

But if Emily refinances for $900,000 and uses $100,000 to pay her children’s tuition, rather than home improvements, then she can deduct interest on only $800,000 of the refinancing.

Home-equity loans and lines of credit (HELOCS)

The law now prohibits interest deductions for such debt unless the funds are used for certain types of home improvements. Before 2018, homeowners could deduct the interest on up to $100,000 of home-equity debt used for any purpose.

To be deductible now, the borrowing must be used to “buy, build or substantially improve” a first or second home. The debt must also be secured by the homeit applies to, so a Heloc on a first home can’t be used to buy or expand asecond home.

For more information and a list of improvements that are eligible, see IRS Publications 936 and 523.

This year’s tax deadline for most individuals is April 18. Interested in knowing more before you file your taxes? Register free to download your complimentary copy of the WSJ Tax Guide 2022.

Write to Laura Saunders at [email protected] and Richard Rubin at [email protected]

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