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How Does the Proposed Tax Restructure Affect Me?

As of November 2, 2017, the House Republican tax plan halves the cap on the deduction of mortgage debt for newly purchased homes to $500,000. It does, however, maintain the current deduction of up to $1 million in mortgage debt for current homeowners.  So, if you currently have a $1 million mortgage or less, you will still be able to deduct all mortgage interest in years to come.  To offset this perceived “increase in tax,” the plan also nearly doubles the standard deduction, meaning fewer taxpayers would itemize and take the mortgage interest deduction. Currently, about 21 percent of filers take the mortgage deduction, but under the new framework only about 4 percent would, according to recent estimates from the Tax Policy Center.

The housing industry has been lobbying hard to keep homeowner incentives, and this is not what they were looking for.  “We are currently reviewing the details of the tax proposal released today, but at first glance it appears to confirm many of our biggest concerns about the Unified Framework,” said National Association of Realtors President William Brown, in a statement.  “Eliminating or nullifying the tax incentives for homeownership puts home values and middle-class homeowners at risk, and, from a cursory examination, this legislation appears to do just that.”  In a statement, the National Association of Homebuilders called the plan “particularly disappointing.”  “By sharply reducing the number of taxpayers who would itemize, what’s left is a tax bill that essentially eviscerates the mortgage interest deduction and strips the tax code of its most vital homeownership tax benefit,” said NAHB Chairman Granger MacDonald.

The current standard deduction is $6,350 for single tax filers and $12,700 for married tax filers. The proposed House Republican tax plan would double these deductions, thus encouraging tax payers to simply claim the higher deduction in lieu of itemizing, which would include mortgage interest deductions.  Here are some examples of how the new tax plan might affect your situation:

Example 1:

If you are single, own a home, and are still paying mortgage, your total annual interest is $12,700 ($6,350 X 2) or less, and you have minimal other tax-exempt expenses, the proposed tax plan would have minimal consequences.  If you have only about $6,000 in annual mortgage interest and about $8,700 in other tax deductions, the new tax plan would be a wash because to total tax deductions would be about $12,700, or the same amount as the standard deduction.

Example 2:

If you are married, your home is paid for, and you normally do not claim other tax deductions, you are essentially getting an extra $11,300 in tax deductions.  Depending on your tax bracket, this could equate to an annual savings of about $2,500 to $5,000.