After December 15, 2017, the regulations governing deductions for 2018-2025 apply to refinancing a first mortgage finalized after that date. Mortgages are taken out before this date are eligible for the grandfather clause. Unless the first mortgage entered into force on or before that date, the Tax Cuts and Jobs Act's provisions regarding refinancing are not applicable. Furthermore, the total amount of the new loan and the existing mortgage must be comparable.

How the Money Must Be Used

The size of the funds and their purpose both play a role in determining whether or not you are eligible to deduct the interest paid on a loan that is more than your existing mortgage. According to the regulations that govern home loans, interest payments may be deducted if you utilize the loan proceeds to purchase, develop, or significantly enhance either your main or secondary place of residence.

Because of the change in the legislation, for you to deduct any money from your home equity, the funds must be utilized exclusively for this objective. Previously, the home equity loan money may have been used on anything the borrower desired. The associated tax legislation does not let you deduct interest payments on consumer loans when you utilize the surplus funds for any other purpose. This includes paying off other debts.

Consumer Loans vs. Home Equity Loans

Using the money to pay off personal obligations, such as credit card bills, vehicle loans, medical expenditures, and other personal debts, such as past-due federal and state income taxes, is considered a "consumer loan." Because of the laws in place for home equity loans before 2018, the vast majority of borrowers could circumvent the limits placed on deductions for consumer interest in the past.

Limits on Mortgage Indebtedness

You can take a tax deduction for the interest paid on the first $750,000 of your mortgage loan. According to the Internal Revenue Service, the ceiling is $375,000 if you are married but file separate tax returns (IRS). If you attempt to deduct mortgage interest on debt incurred before December 15, 2017, you are subject to a maximum of one million dollars. If both spouses are married but file their taxes separately, the cap is increased to $500,000.

Under the previous guidelines, you could deduct interest on an additional $100,000 of the loan, or married couples could deduct $50,000 apiece if they filed separate tax returns. Refinancing loans include partial house purchase loans and partly home equity loans, a maximum of $750,000, or $375,000 each, for a married couple filing separately; however, this restriction does not apply.

Effect of the Alternative Minimum Tax

Suppose you are subject to yet another regulation due to your alternative minimum tax (AMT) payment. Due to the complex regulations governing this tax, interest paid on mortgage loans used to purchase a property may still be deducted. However, they do not allow a deduction for interest paid on home equity loans for primary or secondary residences unless the money from the loans is used to purchase, construct, or significantly enhance the properties.

Itemizing Is Required

One further thing to keep in mind is that you have to itemize your expenses to benefit from this tax deduction. This requires you to complete and attach Schedule A to your Form 1040 tax return. Throughout the year, you'll utilize that form to itemize every tax-deductible dollar you spend. After that, you would claim a reduction in the overall amount.

When it comes to doing your taxes, you may not mind putting in a little more effort if doing so would save you money. However, there is a possibility that this may not occur since the TCJA also resulted in a significant increase in the amount of the standard deduction that is available to taxpayers in 2018. Starting in 2022, taxpayers will be able to deduct the following amounts as their standard deductions:

• Increase from $25,100 in 2021 to $25,900 for taxpayers who are married and file their taxes jointly.
• $12,950 for single or married taxpayers but separate filing returns.
• $19,400 for taxpayers eligible to receive the head of household credit, an increase over the previous threshold of $18,800 in 2021.

Taxpayers must decide between deducting their itemized expenses and obtaining the standard deduction. They can't have it both ways. Your itemized deductions must have a cumulative value higher than the standard deduction amount to which you are entitled. If it isn't, you will be required to pay taxes on a higher income than you already do. Both the standard deduction and the sum of your itemized deductions work to reduce the amount of income subject to taxation.