Interest Deductions in Tax Reform Proposals
By Brent D. McLaughlin and Megan L. Austin
The House and Senate tax reform bills both would make significant changes to deductions. Here is how the bills address deductions for mortgage interest, student loan interest, business interest, and taxes.
Itemized deduction for mortgage interest
Currently, taxpayers may deduct the interest paid on acquisition indebtedness up to $1.1 million in total – $1 million for the purchase of the residence, and $100,000 of home equity indebtedness on up to two homes. Mortgage interest on loans in excess of these amounts is not deductible. Under the House bill, the limitation on home mortgage indebtedness drops to $500,000 for mortgages taken out after November 2nd, 2017, and the debt can only relate to the taxpayer’s principal residence. Taxpayers would no longer deduct be able to deduct the interest on a second home. If a mortgage that was in existence before November 2, 2017, is refinanced, the $1 million cap remains in effect. Under the Senate bill, the $1 million limitation would remain, but interest related to the $100,000 of home equity indebtedness would not be deductible from 2018 through 2025.
Above-the-line deduction for student loan interest
Currently, up to $2,500 of student loan interest is deductible if modified adjusted gross income is below the phase-out threshold of $65,000 for a single individual, or $130,000 for a couple filing jointly. It is phased out entirely when modified adjusted gross income exceeds $80,000 for a single filer or $160,000 for a couple filing jointly. The proposed tax changes in the House bill disallow this deduction after 2017, while the Senate bill does not address this issue. This will have little to no impact for most high net-worth taxpayers, as the deduction is already phased-out under current law.
Corporate deduction for interest
On the business side, interest expense deductions would be limited. Currently, 100% of interest expense is deductible if the loan proceeds are used in the business. Under the House and Senate proposals, the interest expense deduction would be limited to 30% of the businesses’ adjusted taxable income. Under the Senate bill, any disallowed interest can be carried forward to the next five taxable years. The House bill includes an exemption from this rule for businesses with average annual gross receipts of $25 million or less, while the Senate bill lowers the exemption cap to $15 million.
Itemized deduction for state and local taxes
There are also changes proposed to the current deduction allowed for taxes paid. Taxpayers can currently take deductions for state and local income or sales tax, state and local personal property tax, and for state, local, and foreign real property tax as itemized deductions on Schedule A. Under both the House and Senate bills, only state and local real property taxes would be deductible after 2017, and the deduction for real property taxes would be capped at $10,000 (or $5,000 for married taxpayers filing separately).
Corporate deduction for taxes
The deduction for taxes paid currently allowed to businesses would not change under the proposed House and Senate bills. Businesses would still be allowed to deduct foreign income tax, state and local real property tax, and state and local personal property tax paid or accrued in carrying on a trade or business or income-producing activity.