If you are of a certain age, you are familiar with the advice: Buy a home so you can enjoy the tax breaks that go along with it.
Many Americans still subscribe to this theory. In fact, 26% of respondents in a recent LendingTree survey said they would rather own than rent because they want to access additional “tax deductions.”
But for millions of Americans, those tax deductions now are a mirage, because they no longer offer much — if any — benefit.
Mortgage interest is an itemized deduction, meaning you can claim it only if you itemize all of your tax deductions, rather than taking the standard deduction, which is a flat amount. You must choose one or the other when filing your federal income tax return.
The Tax Cuts and Jobs Act of 2017, which overhauled much of the federal income tax code for individuals through 2025, temporarily has taken away the incentive for many taxpayers to itemize their deductions.
The federal tax law did that by making the standard deduction far more generous than it was before. In fact, the deduction nearly doubled.
Prior to tax reform, millions of homeowners chose to itemize in part because they could write off both their mortgage interest.
Now, many taxpayers are better off taking the standard deduction instead of itemizing.
As a result, millions of people who used to itemize now take the standard deduction. They do this because they come out ahead financially — meaning they get a bigger tax refund or smaller tax bill by taking the standard deduction — even though it means they can’t write off their mortgage interest.
For the 2017 tax year, about 33.7 million tax returns claimed the mortgage interest deduction, according to IRS data. For 2018, the first year for which the new tax law applied, only about 13.9 million returns included this deduction.
The 2017 tax law also decreased the amount of mortgage interest you can deduct. Now, you generally can only deduct mortgage interest on the first $750,000 ($375,000 if married filing separately) of indebtedness for mortgages taken out after Dec. 15, 2017.
That is down from $1 million ($500,000 if married filing separately) when deducting mortgage interest from indebtedness incurred before Dec. 16, 2017.
All of this means a lot of renters who fondly imagine that owning a home will bring them additional tax deductions likely are deluding themselves. While there are other deductions for homeowners — see “8 Federal Income Tax Breaks for Homeowners” — none necessarily justifies owning over renting.
Of course, there are plenty of good reasons to own a home that go well beyond tax deductions. In fact, recent history seemingly has dispelled the myth that tax incentives are necessary to encourage people to buy homes.
Before the passage of the tax reform bill, the National Association of Realtors projected that once the mortgage interest deduction lost its luster, home values across the nation would fall anywhere from 10% to 21%.
Instead, home values are now at record highs in many markets across the country.
Apparently, Americans realize that owning a home offers many perks. But for millions of homeowners, a smaller tax bill no longer is among the benefits.
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