Per the U.S. Census Bureau, over half of U.S. homes are occupied by the owner. Of those homeowners, over half have a mortgage that they pay interest on. For most, having a mortgage is part of owning a home and people often spend a significant portion of their life making payments on their mortgage.

Before the recent change the U.S. Tax Code, Section 163 specifically provided for a deduction for mortgage interest and home equity interest as an itemized deduction. This deduction has allowed taxpayers that can itemize to save tax dollars while they pay down their debt.

With the recent passing of the Tax Cuts and Jobs Act, the deduction for mortgage interest has undergone two significant changes that will impact many.

Here is what will change in 2018:

Under the prior law, taxpayers had been allowed to deduct interest on home equity indebtedness up to $100,000. In 2018, this deduction is eliminated and there will no longer be a tax benefit for interest paid on an equity loan.

The second significant change is that taxpayers were allowed to deduct mortgage interest on mortgages up to $1,000,000. The Tax Cuts and Jobs Act now allows taxpayers to deduct interest on mortgages up to $750,000 for all mortgages originated after Dec. 14, 2017.

What happens if you refinance? Taxpayers will be allowed to keep their higher threshold of $1,000,000 if they refinance a loan that was established before Dec. 14, 2017, as long as the new debt doesn’t exceed the amount refinanced. In other words, you will fall under the new rules if you refinance your mortgage and increase the loan amount.

While there are only a small percentage of taxpayers that have a mortgage over $750,000 in Maine, there are a lot of taxpayers who have been deducting the interest on their home equity loans. If these taxpayers still itemize deductions in 2018, they will no longer be able to take advantage of the equity interest deduction.

It is important to understand that the law continues to allow the mortgage interest on a second home. This law has not changed from previous years and taxpayers may benefit from a deduction of mortgage interest on their first and second homes, provided that the total indebtedness does not exceed the $750,000 threshold.

I encourage everyone to take some time and read or speak to a tax advisor about the changes under the new tax law and how it will impact you specifically.

“An investment in knowledge pays the best interest,” Benjamin Franklin.

Alison Royall, CPA is a director at Perry, Fitts, Boulette & Fitton CPAs. She works with people and businesses to prepare tax returns and help them plan their short and long-term goals. She is a multi-state tax specialist, with clients in many other states including international clients. She works with the audit department and prepares compiled and reviewed financial statements for businesses, as well as personal financial statements for high net worth individuals. She can be reached at [email protected] or 873-1603.