For new homeowners, tax returns have taken an unexpected turn, and surprisingly, it’s for the better. The Tax Cuts and Jobs Act (TCJA) of 2017 significantly impacted the landscape of tax benefits, particularly affecting the mortgage interest deduction—a vital advantage for homeowners filing itemized returns.
However, the current era of high interest rates is reshaping this calculation, offering relief to those navigating the challenging housing market.
The Tax Benefits of Rising Interest Rates
The TCJA narrowed the pool of households eligible for deductions on mortgage interest payments, leaving many homeowners with reduced benefits amidst soaring home prices, limited inventory, and expensive mortgage rates.
Yet, today’s high interest rates are favoring homeowners looking to claim this overlooked benefit, providing a glimmer of hope amid housing market struggles.
Nicole Han, a Realtor and former accountant at Ernst & Young’s real estate tax practice, underscores the significance of this resurgence: “The benefit of the itemized deduction definitely comes back into the picture. It gives [homebuyers] peace of mind, knowing a big portion of their mortgage payments is going towards the home’s equity, and that interest can be deducted.”
President Trump’s tax law changes significantly altered the eligibility criteria for deductions, reducing the eligible principal and increasing the standard deduction. Consequently, only 13.7% of filers currently claim the mortgage interest deduction—a departure from previous years.
A New Approach to Homeownership and Taxes
Nevertheless, there’s a silver lining for buyers. New homeowners with high borrowing rates stand to benefit from the shift in tax outcomes, potentially surpassing the standard deduction threshold through various deductions, including mortgage interest, property taxes, state income tax, medical expenses, and charitable donations.
Han advises homeowners to leverage higher interest rates: “I highly encourage owners to take advantage of the higher interest rate. It seems scary at first, but it’s worth it.” Locking in a high interest rate enables homeowners to maximize itemized deductions, offering financial relief during the initial homeownership years.
The impact of these changes extends beyond individual households, with regional and political variations. Areas with larger income tax obligations, such as California, New York, and New Jersey, saw significant reductions in annual tax benefits. Additionally, interest rate fluctuations further influenced tax outcomes.
The difference between previous years and the current landscape is stark. Three years ago, low mortgage rates limited potential deductions, often falling short of justifying itemization. However, current rates reaching unprecedented levels mean recent homebuyers can surpass the standard deduction threshold through mortgage interest expenses alone—a significant shift in the tax landscape.
In essence, while high interest rates pose challenges for new homeowners, they also present opportunities to navigate tax returns more favorably. Understanding the interplay between interest rates and tax benefits is crucial for homeowners seeking to maximize their financial well-being in an evolving housing market.
