How does a refinance in 2017 affect your taxes?
Being a homeowner offers big tax advantages, not the least of which are perks related to that mortgage you pay every month.
And if you refinanced your mortgage in 2017, there are some specific "dos" and "don'ts" you need to know prior to filing your income taxes, as well as a few pointers that can help you lower your tax bite.
The following information will help to reduce your federal income taxes and get you prepared for mortgage-related tax issues in 2018 and beyond.
Do: Itemize to claim your mortgage interest deduction
As long as you itemize deductions on Schedule A (Form 1040), you can typically deduct up to $1 million in interest ($500,000 if you're married, filing separately) that you pay on a home loan for your primary residence, including your refinanced mortgage. One catch is that the loan must have been originated prior to December 14, 2017; mortgages originated after that date will be subject to $750,000 and $375,000 limitations.
Also for the 2017 tax year, interest paid on a home equity loan is generally deductible up to $100,000 for any purpose. This too is changing under the new tax laws; unless home equity debt is used as a part of a property acquisition or to "substantially" improve the home, interest paid on home equity loans and lines of credit will no longer be deductible. Of course, the mortgage interest deduction isn't available to those who take a standard deduction, only to those who itemize.
"When it comes to filing your tax return to reflect a refinance you did in 2017, the good news is that tax deductions for mortgage interest paid are still in place," says mortgage expert Debra Jones. "Will it remain that way in the future? Who knows? Although it is assumed that the mortgage interest deduction will remain intact, it has been a subject of much political and economic debate in this current presidential election season."
This has been the case in a few of the last election cycles, and indeed, tax reform passed by Congress did reduce the mortgage interest deduction for future homeowners. Older loans will be "grandfathered", so interest on loans up to $1,000,000 will still be deductible, but for mortgages taken after December 15, 2017 the limit will be chopped to $750,000 ($375,000 if married filing separately).
Do I get to write-off private mortgage insurance premiums as I did in 2016?
Probably not. Congress originally allowed homeowners to deduct mortgage insurance as part of the Mortgage Forgiveness Debt Relief Act of 2007. The law was extended several times through 2016, but effective Jan. 1, 2017, the tax deduction for mortgage insurance expired, meaning homeowners can't claim this deduction for tax year 2017.
Unfortunately, this means if you refinanced in 2017, mortgage insurance premium payments you may make aren't tax deductible, at least so far, and unless Congress retroactively allows for a deduction for the 2017 tax year, there is no deduction. That's not to say it might not happen; H.R.109, the Mortgage Insurance Tax Deduction Act of 2017 was introduced in the House of Representatives in January 2017, but hasn't gone anywhere. With the tax overhaul just passed, it does seem less likely that this break will return.
When it was available, certain income restrictions applied; the deduction was phased out for those with adjusted gross incomes exceeding $100,000, or $50,000 for married couples filing separate federal income tax returns.
Don't: Raise red flags by erroneously claiming points and fees from your refinance
"People often make the mistake of thinking that the points and fees paid on a refinance are tax deductible just as they may have been when they originally obtained the mortgage on their home," says Jones. "That, however, is not the case."
Jones explains that, per IRS guidelines, points paid when refinancing are not taken in full during the year in which the refinance was obtained. "Instead, the points must be deducted equally over the life of the loan," she says. "To figure the annual deduction amount, divide the total points paid by the number of payments to be made over the life of the loan. Usually, this information is available from the lender."
For example, a homeowner who paid $2,000 in points on a 30-year mortgage (360 monthly payments) could deduct $5.56 per payment, or a total of $66.72 for 12 payments. Taxpayers may deduct points only for those payments actually made in the tax year, according to Jones.
Note: If your 2017 refinance was a second (or more) refinance, the undeducted portion of any points that were to spread among the old loan's remaining term are accelerated into the current year, and so the remainder of those undeducted costs become be fully deductible this year. Of course, any new points paid for the new mortgage will again be spread out over the new loan's term, as before.
Spreading the points paid over the life of the loan isn't the only factor determining whether or not your refinance expenses are fully tax deductible. You also have to take into account whether your original loan was before or after October 1987 (if you incurred mortgage debt prior to Oct. 14, 1987, different rules concerning tax deductibility may apply), whether or not your total combined mortgages exceed the allowable limit for the mortgage interest deduction, and whether or not portions of the refinance were used for home improvement, Jones says. "That last factor can sometimes enable you to write off more expenses during the year of the refinance," she notes.
If you're a homeowner, you certainly should take advantage of every homeownership tax deduction for which you qualify. But to make sure you don't run afoul of IRS tax rules, be sure to consult an accountant or financial advisor regarding your particular situation.
It's also a good idea, Jones suggest, to read IRS Publication 936 where all the nuances concerning the tax deductibility of mortgage refinance expenses are fully explained. "It's not necessarily in 'plain English,' but it's explained nonetheless," Jones says.
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Keith Gumbinger contributed to this article.
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