Possible Changes to Mortgage Interest Deductions in New Jersey

The tax plan created by some members of Congress, and endorsed by the president, could change the way mortgage interest deductions work in New Jersey and across the nation. Here’s an update on the current rules for mortgage interest deductions in New Jersey, and the proposals that could potentially alter them in 2018.

Mortgage Interest Deductions in New Jersey: A Popular Tax Break

Mortgage interest deductions are a hot topic among home buyers and homeowners in New Jersey, and it’s easy to understand why. The average homeowner could save thousands of dollars per year by using a mortgage interest deduction. Nationally, they add up to approximately $70 billion per year, according to recent reports.

They are essentially a form of subsidy, through which homeowners can file a tax deduction for the interest they pay on their home mortgage loans.

Under the current tax law, homeowners in New Jersey and nationwide are allowed to claim a deduction for mortgage interest paid. These deductions can be applied to a principal residence as well as one additional residence. They are typically capped at $1 million for the first mortgage, and $100,000 on a second mortgage.

Change Could Reduce Number of Homeowners Who Benefit

The tax reform package supported by President Trump could change how mortgage interest deductions work in New Jersey, which is why some groups are opposing the change.

The Republican-sponsored bill would essentially cut the mortgage interest deduction in half (from $1 million to $500,000) for newly originated mortgages, by reducing the amount that can be deducted.

To quote the bill:

The aggregate amount of indebtedness taken into account under subparagraph (A) for any period shall not exceed $500,000 (half of such amount in the case of a married individual filing a separate return).

As it is currently written, the “Unified Framework for Fixing Our Broken Tax Code” would also double the standard deduction, which taxpayers can utilize if they don’t itemize their deductions.

As an Associated Press article recently explained it: “the doubled standard deduction could exceed the savings many received now from itemizing their expenses for housing, state and local taxes, and related costs.”

Economists predict that the “United Framework” proposal would essentially reduce the number of people who use the mortgage interest deduction in New Jersey and nationwide. While the plan would keep the deduction place, it would also marginalize its usage by changing the way deductions are handled for those who itemize.

Under the current law about 21% of households claim the deduction on their taxes, according to the Tax Policy Center. If the current proposal gets passed, that number could drop to around 4% of households. So while the deduction would remain, it would be useful to a smaller percentage of homeowners.

Len Burman, an economist and tax policy expert, summed it up nicely in an article he wrote for Forbes:

“…the Unified Framework, by substantially increasing the standard deduction and repealing many itemized deductions, would substantially reduce the overall value of the MID, and make it irrelevant for nearly all homeowners, even if it stays on the books.”

This is why many within the real estate industry, including the National Association of REALTORS® and the National Association of Home Builders, have expressed concerns over the proposed tax plan.