Rushing to Pay Off Your Mortgage? Why New Tax Laws Might Make You Want to Wait.

Blog posted On September 25, 2018

The Tax Cuts and Jobs Act (TCJA) enacted earlier this year provided the most sweeping changes to the tax code in decades.  One of the most relevant changes for homeowners was the new cap for mortgage interest deductions.  With tax cuts increasing wages, the savings rate improving, and the economy booming, some homeowners may consider paying off their mortgage sooner, especially with the changes to the mortgage interest tax deduction.  MarketWatch columnist, Peter Morici, suggests, “The new tax law should cause many folks to consider paying off their mortgages but that is hardly best for everyone.”

Previously, married homeowners could deduct up to $1,000,000 in mortgage interest and single homeowners could deduct $500,000.  Starting this year, married homeowners can deduct up to $750,000 in mortgage interest and single homeowners can deduct up to $350,000 on mortgage loans originated after December 15, 2017.  The deduction for state and local taxes (SALTs) is now capped at $10,000 per return.  While the TCJA lowers the cap for mortgage interest and SALTs deduction, it raises the standard deduction.  Married couples can deduct up to $24,000 and single taxpayers can deduct up to $12,000. 

For example, if an unmarried couple, Jack and Anne, own a home together and Jack pays $10,000 in interest on a $250,000 mortgage and $13,5000 in SALTs and Anne pays $9,500 in SALTs and donates $1,000 to charity, Jack should take an itemized deduction of $21,000 and the Anne would benefit more from the standard deduction of $12,000.  If the couple gets married and they file separately, they would each only be able to deduct up to $5,000 for SALTs and Jack’s allowable deductions would drop to $16,000 and Anne’s would drop to $6,000, losing $11,000 in combined deductions and incur additional taxes.  Filing jointly and taking the standard deduction would be more cost-effective.

After several years of historically low interest rates, recent home buyers likely financed their homes with some of the lowest interest rates in over a decade.  Paying down higher interest debt like credit card balances or student loans would save these homeowners more money than rushing to pay off this mortgage debt.  Most Americans dream of living debt-free and the goal is achievable when you pay off your most costly debt first. 

Sources: MarketWatch, MarketWatch