Will I lose my mortgage deduction in 2018 with the increased standard deduction?

[rallycobra]

I'm in NJ, married filing jointly, and have high property and income taxes.

Looking at my 2016 Schedule A, I see deductions for State Income taxes, Property taxes, Mortgage interest, and charitable donations.

 

My property tax is well over $10k, so that will max out the $10k SALT (State and Local Taxes) limit.

 

My mortgage interest and donations are significantly below the $24k standard deduction for 2018. Will I claim the 24k standard deduction in 2018? In effect, it negates the mortgage interest deduction. I could pay the mortgage off and it wouldn't change my taxes.

 

I suggest everyone read this excellent article. It's a very helpful for comprehension of your tax return

https://www.whitecoatinvestor.com/understanding-your-own-tax-return/

 

[VagabondMD]

Add your $10k (state and local taxes, property tax, sales tax roll up) to your charity and mortgage interest. If that number is greater than $24k, you will be itemizing. If it is lesser, you will be taking the standard deduction.

By the end of the year, so long as it does not trigger AMT, you could benefit from aggregating future charitable contributions (by making them now, or opening or contributing to a Donor Advised Fund (DAF) and or prepaying 2018 property tax (if your locality allows it). This is a "one-time" hack that will not be useful going forward.

[hightower]

rallycobra wrote:

I could pay the mortgage off and it wouldn’t change my taxes.

 

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This is going to be a common theme in years to come.  For most people, there is no longer an advantage to holding onto a mortgage.  It would be better to sell my home, downsize into something I can pay cash for and enjoy the benefits of not paying interest to a bank any longer.  Now my only task is to convince my wife of this.  My house isn't very expensive really, but I still don't want to be paying 4% interest on a 290k loan for the next 20 years with zero tax benefits.

This is precisely why real estate markets in HCOL areas are going to see a major decline very soon IMO.

[rallycobra]

Thank you, I think I understand now

For 2018 :   Itemized deductions =  max $10k SALT + Mortgage Interest + Charitable Donations

If your itemized deductions are less than $24k, you can use the larger standard deduction of 24k. If you take the standard deduction your mortgage isn't deductible.

 

For 2017, consider paying future property taxes if you aren't in the AMT. Also, for NJ estimated taxes, make the last 2017 payment IN 2017. They are due 1/15/18 but can be paid before the end of the year. Don't underpay them either. For maximum benefit you probably want a small refund coming in April of 2018.

[StarTrekDoc]

Yeah -  2017 --  Calculate your AMT space - then maximize to that point by:  Prepaying 2018 property tax (one time benefit)  and the rest as a DAF (to cover your 2018 donations).     Hopefully that would be enough to push you into a standard 2018 and then load up for 2019 itemized with DAF bolus

That's our plan over the next decade to do since we have a fair of amount of donations.

[Hank]

hightower wrote:

 

This is precisely why real estate markets in HCOL areas are going to see a major decline very soon IMO.

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I disagree that real estate markets in high tax, high cost of living areas will see a "major decline".  I would expect the price of properties that currently are  $750K to $1M will grow more slowly over the next 2-3 years.

Likewise, I would expect to see a lot of houses that ought to cost $650K or $700K to sell for $750K now so people can "maximize their tax savings".

[jz]

Strongly disagree with Hank, above.  With most all taxpayers becoming standard deductors, the real and psychological tax benefits of any interest+property tax < $24k /couple combo will evaporate.  We are on the precipice of watching deflation of private home ownership.

[ajagannathan]

jz wrote:

Strongly disagree with Hank, above.  With most all taxpayers becoming standard deductors, the real and psychological tax benefits of any interest+property tax < $24k /couple combo will evaporate.  We are on the precipice of watching deflation of private home ownership.

Click to expand...

Agree with this.  I currently have a 10 yr fixed 2.5% mortgage with balance of 8 1/2 yrs left at 425k that I have no incentive not to prepay aggressively now as I'm going to use the standard deduction moving forward.  Had the new tax laws been in place when I was looking at houses I most definitely would have looked for cheaper houses in areas with lower property taxes (current 20k/yr).  Neighborhoods like mine are going to take a serious property value hit the next few years, I'd guess 10-15% at least.

[DMFA]

iradoc wrote:

jz wrote:

Strongly disagree with Hank, above.  With most all taxpayers becoming standard deductors, the real and psychological tax benefits of any interest+property tax < $24k /couple combo will evaporate.  We are on the precipice of watching deflation of private home ownership.

Click to expand…

Agree with this.  I currently have a 10 yr fixed 2.5% mortgage with balance of 8 1/2 yrs left at 425k that I have no incentive not to prepay aggressively now as I’m going to use the standard deduction moving forward.  Had the new tax laws been in place when I was looking at houses I most definitely would have looked for cheaper houses in areas with lower property taxes (current 20k/yr).  Neighborhoods like mine are going to take a serious property value hit the next few years, I’d guess 10-15% at least.

Click to expand...

I think better gains in the market than preventing finance charges are an incentive not to pay aggressively on a low-interest, short-term loan.  You're looking at about $47,195 in interest paid over 8.5 years; from a lump-sum perspective that's (1+[47195/425000])^(1/8.5) - 1 = 1.247% CAGR; that's like 1-year CD rates, and you *should* be able to beat the nominal 2.5% even though you can't directly compare finance charges prevented on a simple amortizing debt to compound growth of investments based on a simple percentage rate.  More simply put, 2.5% is pretty good arbitrage.

Now, if you have no use for that arbitrage because you've got a high net worth and income, and you're already hitting well-placed investment goals, and there's no real point to increasing your exposure to market risk, sure, have at it.  Further, if your property value is decreasing, then you're putting money into a depreciating asset...doesn't seem like something I'd really want to do.  I'd share the risk with the bank and keep my money in the market, but you are never wrong to take the certain thing and eliminate the debt.

You know what your risks are either way.  You're going to make the decision that's right for you because only you know your goals and comfort level, and that's fine.  You don't have to please the people in the ivory tower like me.

[Slav4ikMD]

"Likewise, I would expect to see a lot of houses that ought to cost $650K or $700K to sell for $750K now so people can “maximize their tax savings."

Interesting thought - I can see how psychologically that may be.  But hopefully most home buyers are a little smarter than that.  What I can definitely anticipate though is that folks looking to buy in pricier suburbs (like mine), will look to limit their *mortgage* to 750k, and with a typical 20% down it will mean limiting the price of the house to low 900's - with many houses in my neighborhoods being at just around a mil or a little over, I can see THAT dropping prices.  Neighborhoods with higher property taxes are also likely to take a hit.

 

[Slav4ikMD]

I currently have a 30 year fixed 3.75% mortgage with around 800k, just 2 years into, prepaying more and had a plan to increase payments further to pay off in 10-15 years, but now questioning whether that is a wise decision.  As DMFA said, putting money into a depreciating asset doesn't sound like fun.  At the same time becoming debt free is still pretty cool. (I think our most likely plan is to live there for 15 years and then downsize once kids grow up.)  So really not sure what to do...  will probably continue to pay moderately aggressively and see what happens over the next 2-3 years.

[DMFA]

A good hedge would just be to pay it like it's a 15-year, or even a 10. It's okay to have a small amount of guaranteed low gains on your overall portfolio, esp if it's a big one. Preventing finance charges can be thought of like that.

I just up mine to the next round hundred and add $100...so if the payment is $1850, I just up it to $2000.

[Slav4ikMD]

Yeah I'll probably shoot for 15 anyway.  Even if it depreciates in value, it's still better to have more equity rather than less.  Much of this is purely psychological.  And I doubt we'll see huge drops in real estate prices, unless something ELSE happens.

re "I just up mine to the next round hundred and add $100."  I do something similar - I have a "laddered" approach (not sure if others do that too, but I just came up with it) - first year I added $200 a month, then $400 a month etc - this forces me to basically throw any small increases in income into the mortgage (as long as I can still maximize all tax deferred savings and such).

[ajagannathan]

DMFA wrote:

iradoc wrote:

jz wrote:

Strongly disagree with Hank, above.  With most all taxpayers becoming standard deductors, the real and psychological tax benefits of any interest+property tax < $24k /couple combo will evaporate.  We are on the precipice of watching deflation of private home ownership.

Click to expand…

Agree with this.  I currently have a 10 yr fixed 2.5% mortgage with balance of 8 1/2 yrs left at 425k that I have no incentive not to prepay aggressively now as I’m going to use the standard deduction moving forward.  Had the new tax laws been in place when I was looking at houses I most definitely would have looked for cheaper houses in areas with lower property taxes (current 20k/yr).  Neighborhoods like mine are going to take a serious property value hit the next few years, I’d guess 10-15% at least.

Click to expand…

I think better gains in the market than preventing finance charges are an incentive not to pay aggressively on a low-interest, short-term loan.  You’re looking at about $47,195 in interest paid over 8.5 years; from a lump-sum perspective that’s (1+[47195/425000])^(1/8.5) – 1 = 1.247% CAGR; that’s like 1-year CD rates, and you *should* be able to beat the nominal 2.5% even though you can’t directly compare finance charges prevented on a simple amortizing debt to compound growth of investments based on a simple percentage rate.  More simply put, 2.5% is pretty good arbitrage.

Now, if you have no use for that arbitrage because you’ve got a high net worth and income, and you’re already hitting well-placed investment goals, and there’s no real point to increasing your exposure to market risk, sure, have at it.  Further, if your property value is decreasing, then you’re putting money into a depreciating asset…doesn’t seem like something I’d really want to do.  I’d share the risk with the bank and keep my money in the market, but you are never wrong to take the certain thing and eliminate the debt.

You know what your risks are either way.  You’re going to make the decision that’s right for you because only you know your goals and comfort level, and that’s fine.  You don’t have to please the people in the ivory tower like me.

Click to expand...

Absolutely, you are right from a numbers standpoint.  Though in my situation I'm fairly happy psychologically with my current risk exposure wrt AA.  I was already considering prepaying off the mortgage even before the new tax deal, but wasn't in any rush at all given the mortgage interest deduction.  Now that that deduction is useless to me, my feeling is I may as well just get this (light as it may be) monkey off my back.   I'm just going to shorten my timeline in 1/2 or so, I just prepaid two years of property tax so I'll just pour the refunded escrows the next couple yrs back into the principal.

This is a great site, such invaluable info.  

[ajagannathan]

Slav4ikMD wrote:

“Likewise, I would expect to see a lot of houses that ought to cost $650K or $700K to sell for $750K now so people can “maximize their tax savings.”

Interesting thought – I can see how psychologically that may be.  But hopefully most home buyers are a little smarter than that.  What I can definitely anticipate though is that folks looking to buy in pricier suburbs (like mine), will look to limit their *mortgage* to 750k, and with a typical 20% down it will mean limiting the price of the house to low 900’s – with many houses in my neighborhoods being at just around a mil or a little over, I can see THAT dropping prices.  Neighborhoods with higher property taxes are also likely to take a hit.

 

Click to expand...

Correct me if I'm wrong, but my understanding was that the majority of people in this home buying situation would be switching to standard deduction of 24k and not benefiting from deducting the mortgage interest anyway?