After tax overhaul, mortgage interest deductions seen plummeting

As Americans look ahead to next year’s tax filing season, many fewer individuals are expected to claim once-popular deductions, including the mortgage interest deduction.

Taxpayers filing for 2018 can expect to save a total of $25 billion by taking advantage of the mortgage interest deduction, down from nearly $60 billion for 2017, the congressional Joint Committee on Taxation said on Monday. It expects 13.7 million taxpayers take the deduction, down more than 57% from 32.3 million.

The Tax Cuts and Jobs Act nearly doubled the standard deduction for individuals and married couples filing jointly, making itemizing less attractive for a larger proportion of filers. About 18 million households are expected to itemize under the new law, compared with more than 46 million for 2017. The largest share of those individuals who are still expected to itemize have incomes of $100,000 to $200,000 and $200,000 to $500,000. Those same higher-income individuals are also more likely to claim the mortgage interest deduction.

While the Republican tax reform was being crafted in Congress, homebuilders lobbied to keep the mortgage interest deduction limit unchanged after the House proposed cutting it in half. Ultimately it was capped at $750,000, compared with $1 million under the previous law. In addition, state and local tax deductions were limited at $10,000, drawing concern that the changes would dent purchases of new homes in expensive markets including New York and California.

The National Association of Homebuilders ultimately supported the final version of the bill signed into law by President Donald Trump in December, citing “significant improvements made during the legislative process.”

The housing market faces existing headwinds as reduced inventory coupled with healthy consumer demand has pushed prices up for 70 consecutive months, the S&P CoreLogic Case-Shiller 20-city national home price index revealed on Tuesday. Home prices are now higher than they were at the peak of the housing boom.

Despite a tightening labor market and strengthening overall economy, the consequences of the current housing situation are manifold. It creates more obstacles for first-time buyers, impedes wealth creation and even potentially limits U.S. GDP growth.