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Who Benefits from California Mortgage Interest Deductions in 2018?

A recently published report by a congressional tax committee shows who benefits most from the changes to mortgage interest deduction rules. California homeowners in higher income brackets could get the most benefit from mortgage interest deductions in 2018 and beyond, according to this analysis.

Overall, the total number of taxpayers who actually claim the deduction is expected to drop considerably this year. This is all due to the Tax Cuts and Jobs Act, which made sweeping changes to the U.S. tax code for 2018 and beyond.

Summary of Changes to Mortgage Interest Deduction

In December of last year, the president signed into law the Tax Cuts and Jobs Act. As a result of this multifaceted piece of legislation, most of the tax-related benefits associated with mortgage interest deductions will be concentrated within the upper-income brackets.

In other words, wealthier homeowners could benefit more than “average” earners. This is based on a recent analysis conducted by Congress’s Joint Committee on Taxation (JCT).

Before this bill was passed, homeowners in California and nationwide could deduct the interest on mortgage loans with balances up to $1 million. The Tax Cuts and Jobs Act lowered that limit to $750,000. This means that California homeowners with higher-priced homes might lose some of the tax benefits they had previously, before this change took effect.

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Fewer People Are Expected to Claim It

But there’s another important change that will limit the number of people who actually claim the mortgage interest deduction. Generally speaking, homeowners have to itemize their taxes in order to claim the full benefits of a mortgage interest deduction. But tax policy experts predict that fewer people will itemize, due to the increased “standard deduction” created by the new law.

The Tax Cuts and Jobs Act nearly doubled the standard deduction that can be taken with “no questions asked.” As a result, fewer people are likely to itemize in 2018 and future years. This means that fewer homeowners would claim the mortgage-related deduction when filing their taxes.

The JCT’s report showed that the total savings for taxpayers who use the mortgage interest deduction will drop by more than half in 2018. The estimated savings for 2018 is $25 billion, compared to a savings of nearly $60 billion in 2017 (before the new tax laws took effect).

Wealthier Homeowners in California Benefit the Most

A recent article in the Wall Street Journal described the revised mortgage interest deduction as being “smaller and much more concentrated among high-income households.”

The WSJ article went on to explain:

“In most cases, only taxpayers with total deductions exceeding $12,000 for individuals and $24,000 for married couples will itemize. And those deductions can now include only $10,000 in state and local taxes, which means the most likely itemizers are Americans with sizable mortgages…”

Of course, there are plenty of “sizable” mortgage loans among California’s homeowners. We have some of the most expensive real estate markets in the country, especially here in the Bay Area. So California could have a disproportionate number of homeowners who claim the mortgage interest deduction, compared to other states with lower home values.

Table Shows Distribution of Tax Benefits

The JCT report mentioned above also included a table that shows who benefits the most from the mortgage interest deduction, under the revised rules. The 2018 columns below show the reduced savings brought on by the new tax bill. As the JCT states, it reflects the “dollar benefit to taxpayers from being able to claim the mortgage interest deduction on a tax return.” It also shows how the biggest benefits are enjoyed by wealthier households.

Mortgage deduction benefits

Table: Tax benefit distribution. | Source: Joint Committee on Taxation

Note: We cropped the above table to only show the most relevant columns, for years 2017 and 2018. The original table provided by the congressional committee included columns for 2024 and 2026 as well. You can find the original table by visiting www.jct.gov.

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