WICHITA, KS (WichitaKSRealty.News) As reported in the Wall Street Journal and CNBC, the Trump Administration is looking at a possible limit to the much coveted mortgage interest deduction, but not directly. The limitation would be due to a cap of the overall amount that people can itemize on their taxes. Although the actual impact would be minimal and would only affect a small percentage of borrowers, the buzz is inflammatory. CNBC’s headline of “Heads up homeowners: Mortgage interest deduction on Trump’s Chopping Block” being a prime example of how “coveted” the mortgage interest deduction actually is. Getting past the title, the article does a great job going into the details to explain the true limited amount of filers that the proposed cap would actually impact.
Like many financial calculations there are always variables. With that being said, here are some numbers to help you understand what’s being proposed.
The proposal would limit joint filers personal exemptions to $100,000. So, if you are like most people in the US, your income isn’t sufficient to even reach the limit on the deductions. And, it is highly unlikely to have all of one’s income go to deductible expenses. Let’s say, as an example, one third of your income went to these expenses. If so, you would have to have adjusted gross taxable income in excess of $300,000 to even begin to approach the proposed cap. One of the largest variables is state income taxes. The higher that state tax rate, the higher the likelihood of reaching the cap. These vary dramatically by state. They are zero in Texas, Florida, Nevada, Washington, Wyoming, and South Dakota and upwards of over 13 percent as the top rate in California and almost 10 percent in Oregon.
For Kansas residents, making a few assumptions as outlined in this example, here is about where you would have to be before you would even be in the running for the proposed cap.
- $400,000 in adjusted gross income
- 5% of your earnings to qualifying charities
- State, local and personal property taxes estimated at around $17,000.
- A 30 year fixed rate mortgage of 4.125 percent, Published rate of Capitol Federal Savings Bank for loans up to $1 Million Dollars 12/6/2016 and an actual loan amount of … more than 1 Million Dollars*.
*Mortgage rate deductions are already capped at loans above 1 million dollars.
Starting to get the picture? In essence, you need to be a high wage earner with a large mortgage, live in a high tax state, and/or have large charitable deductions to be affected by the proposed cap.
So, What’s the takeaway? It’s that very few home buyers could possibly be impacted by the cap and that, even if it is implemented, it would have little to no impact on affordability of housing here in the mid-west.