Mortgage Interest Deduction Limit and Income Phaseout

The mortgage interest deduction limit has decreased since the new Tax Cut & Jobs Act was passed in 2018. In the past, you could deduct mortgage interested on up to $1 million in mortgage indebtedness.

Today, according to the IRS, the maximum mortgage amount you can claim interest on is $750,000 on first or second homes if the loan was taken after Oct 13, 1987. You can also deduct interest on $100,000 for a second mortgage loan used for anything other the purchase of your first or second home.

More specifically, home equity debt means “any loan whose purpose is not to acquire, to construct, or substantially to improve a qualified home“.  Interesting right? 

In other words, you can take a $100,000 home equity line of credit to buy a Porsche 911, an incredible home theater system, and do a little landscaping and all the interest is deductible! No wonder why everybody took out so many Home Equity Lines Of Credit (HELOC)!

You already know that the government is sexist because the maximum mortgage interest deduction limit stays at $750,000 even though both people could have $750,000 mortgages. It's beyond me why the government thinks two people who want to marry with $750,000 mortgages each, don't deserve to keep their deductions.

But at any rate, just be aware that if you can afford such a mortgage, you might want to think of this crucial loss of deduction before you get married. With rates averaging 3.25% in 2020,  you could literally lose out on tens of thousands in interest deductions!

Mortgage Interest Deduction Limit And Income Phaseout Killer

Back in 2011, if you have an adjusted gross income of over $166,800, your mortgage interest starts to get phased out. For every $100 of income over $166,800 you lose $3 of itemized deduction X 33.3% up to a maximum loss of 80 percent of your itemized deductions. Talk about another overly complicated rule the IRS/government has implemented.

Example: You make $266,800 and you have $50,000 in mortgage interest deductions. Take $266,800 – $166,800 = $100,000. Then take $100,000 X 3% = $3,000.  Finally, take $3,000 X 33.3% = $999. You can now only deduct $49,001 ($50,000 – $999) from your income instead of originally $50,000.

Questions and conclusions you should have:

1) Where the hell did the government come up with $166,800 income limit as the start of the phaseout? Obama is targeting raising taxes on singles making over $200,000 and couples making over $250,000 (why not $400,000 since two couples making $200,000 = $400,000!?). Supposedly only 2% of Americans earn over $200,000, so I GUESS the target is somewhat reasonable, even though 45% of Americans pay no federal income taxes.  But $166,800?  Why not $150,000 or $162,300?

2) What is the point of multiplying by 1/3 after multiplying by 3% the income you make over $166,800? Beats the shit out of me!  All one has to do is instead of multiply the “overage income” by 3% then by 33.3%, just multiply the overage income by 1% to get the SAME AMOUNT ($100,000 X 1% = $1,000)! You can see through this example how inefficient the government and our tax system is. They add one extra layer to complicate things. They are just waiting for you to mess up your taxes so they can get someone after you and charge you a penalty.  Smart by them!

3) Why are the tax rules always changing? The reason is because there are always new politicians in office who need to push their agenda to show they aren't useless tools. If all laws stayed the same, there would really be no need for such a large government. One year we will have $166,800, 3%, and 33.3% and the next year we could have $200,000 and 1%. We need to always be cognizant of the major tax laws.

4)  The ideal income for maximum happiness is not far off of $200,000 a year. If you make $200,000, the government won't persecute you. You will only lose $331 in mortgage interest deduction as your income is $33,200 above the $166,800 phaseout cap. That's not so bad. Unfortunately, you won't be able to take advantage of the $2,000 Child Tax Credit, which completely phases out at $95,000.

5) The government wants you to be a homeowner. For all intents, providing up to $850,000 in mortgage indebtedness interest to deduct from your income is pretty generous. The median home price is only $340,000.

It's generally good to go with the government and take advantage of all its offerings. In this age of massive monetary stimulus, you should think about owning real assets. Take on reasonable debt given inflation will inflate higher your assets and inflate away your debt.

The Mortgage Interest Deduction Limit Is Better Than Nothing

Most countries have no mortgage interest deduction to help lower you taxes. Examples include Canada and Singapore. Even though the mortgage interest deduction limit has declined, it's still an impressive $750,000. After all, the median home price in America is only around $340,000 as of 2021.

Thankfully, starting in 2016, the phaseout begins with incomes of $254,200 or more and $305,050 for married couples filing jointly. The highest income tax rate is now 39.6% on income over $400,000 as well.

At the margin, the lower mortgage interest deduction will negatively affect higher priced cities that require bigger mortgages. Therefore, to take advantage, I would invest in the heartland of America. Heartland real estate is cheaper, has higher cap rates, and is benefitting from a postive demographic shifts.

The best way to invest in high potential real estate across the country is through real estate crowdfunding.

Two Best Real Estate Crowdfunding Platforms

Check out Fundrise and their eREITs. eREITs enable investors to diversify their real estate exposure with lower volatility compared to stocks. Income is completely passive and there is much less concentration risk.

If you are an accredited investor and like to invest in individual deals, check out CrowdStreet. CrowdStreet focuses on individual commercial real estate opportunities in 18-hour cities. Both platforms are free to sign up and explore.  

Just remember to always do your research and invest a proper asset allocation. There are no guarantees with any investment. I've personally invested $810,000 in private real estate funds to earn more passive income and diversify my expensive San Francisco real estate holdings.

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39 thoughts on “Mortgage Interest Deduction Limit and Income Phaseout”

  1. Wanted to double check – did they change this or are you calculating this incorrectly? The IRS website says deductions will be limited by: “3% of the amount by which your AGI exceeds $309,900 if married filing jointly or qualifying widow(er), $284,050 if head of household, $258,250 if single, or $154,950 if married filing separately.”

    IRS says: (income-threshold) * 3.0%

    You say: (income-threshold) * 3% * 33.3%

    That is, your caculation is much more favorable because you only reduce your deductions by 1/3 as much as what it seems like the IRS says to do. Did they change this over the past few years? Thanks for the clarification.

  2. I’m glad I found this article… I have a quick question for you. We have a $1.4 million mortgage, The house and the loan are both under my name and my girlfriend’s name (we are NOT married). Does that mean we can each deduct up to $700,000?

        1. Yes I think that is correct assuming certain requirements are met. But the interest on the $100K of HELOC debt is added back for Alt Min Tax purposes. In CA you’re likely to pay AMT so the extra $100K might not help. Always good to try though!

  3. I agree it seems like a married couple should get a $2 million limit. Maybe that would be too simple. Recently I did realize that the $1 million is applied per residence, not per taxpayer. So if two single people live together and they each have a $1 million mortgage on the same home, they can only deduct interest on the first million.

  4. william oakes

    the mortgage interest deduction should be eliminated along with all other deductions except charity decuctions.

    We need a simple fair tax method. A flat tax along with a national sales tax would be a good start. The more you buy the more you pay. All citizens would be paying taxes.

    Also the flat tax should start above what would be considered a liveable wage and not the low ridu minium wage standard.

    There should be no permanent welfare payments of any description.

    Any money “borrowed” through welfare should be payed back at some rate.

  5. It’s so funny how stupid people are. Rich pay the most in taxes, Rich people help others financially, Rich people hire people. Poor people do nothing but suck from the system. Poor people don’t donate to charities

  6. @Darwin’s Money
    How is it TeaBagger’s are not even phased by the fact that nearly half the country is Too Poor to pay income tax??? And they say the “Problem” is that poor people should pay more? How can they complain about EIC while deducting $77,000 for Dressage???

  7. This is a really useful article and I love your writing! I have been up all night mulling over the decision on whether or not to buy the home I’m looking at and if I can afford it. This was just the thing I needed to read to help me. It’s true that the government wants us to own and the advantages are huge, the issue is you have to be a financial guru to figure out the complex system.

  8. Question…. the house is in one of my parents’ name, hence, so is the mortgage on the house. I’m helping by paying their mortgage. Any way I can benefit from the tax deduction?

  9. Tom Stevenson

    Probably the reason the IRS doesn’t double the $1 mil deduction for married couples is because they figure the married couple doesn’t need double the house either in numbers or size.

    1. Why would they not think going from an individual to a couple to a family wouldn’t lead to the requirement of a bigger and more expensive house?

      That doesnt make sense.

  10. Sunil from The Extra Money Blog

    taxes are a critical part of sound government, and not everyone will be pleased by the legislation. yes, you don’t have to worry about interest deductions and such in Asian countries, but you also don’t pay mammoth property taxes like we do in the USA.

  11. Darwin's Money

    Wow, you went through a lot of stuff there – and yes, it pretty much all seems silly. The reason for most of these caps is really to quell populist anger. During boom times people don’t complain much, but these days, millions reading the Huffington Post actually think the government should just confiscate the funds of “rich bastards”. The income gap is growing and there’s a media outlet to beat it to death daily. Depending on what happens next election cycle, it wouldn’t surprise me to see these limits come down even further (except perhaps the child tax deduction).

    … and we’ll probably always have half the country pay no federal income taxes while that same half complains about the tax rate “the rich” pay.

  12. I have no idea where they got that number from. I gave up long ago trying to figure the government out.

    I am sick of there being a definition of ‘rich’. Give us a flat tax, and lets just move on.

  13. Mortgage Nerd

    It’s interesting to me how contradictory the different departments of the government are. One part subsidizes housing with the mortgage interest deduction, which suggests that they want people to own homes.

    Then, another section of the government is making it much more difficult for the average person to get a mortgage with the Dodd Frank Bill. And then there is this talk about doing away with Fannie and Freddie which would also make it more difficult for potential home buyers. And then FHA is raising the mortgage insurance premiums making it more difficult.

    It’s getting ludicrous!

  14. I mean really, I looked at the IRS website a couple times, and a couple other resources and I was like HUH? Are you guys stupid? Or, are you guys GENIUSES for putting that extra step in to make people stupid and screw up their returns, so you can come after them for back taxes!

  15. Miss T @ Prairie Eco-Thrifter

    You are so lucky to even have this option in the States. In Canada, you don’t get to deduct any mortgage interest from your income taxes.

    1. You’re right in that we are fortunate, and many other countries such as your own doesn’t allow. However, since we’ve grown up with this mortgage interest deduction, that’s all we know, and therefore all we expect to get.

      That said, Canada has cheap health care! :)

  16. Thanks for the info. I knew there was an income phaseout, but I didn’t know it was $166,800. Sounds somewhat random. Also, there is no way I would have learned about how the deduction gets phased out.

    We are so screwed.

  17. So it seems the gov’t is providing incentive for people with a sub- $166k income to take on as much mortgage as possible (up to $1 million)- looks like they are still trying to enable more sub-prime lending?

  18. It always cracks me up with the random income limits on deductions and credits. I’m a big believer in eliminating all deductions for debt related items, and give tax deductions for interest on savings and dividend income!

  19. Why prop up house ownership artificially? Why is the government so involved in this and why not …say auto ownership?!!

    Lot of things don’t have a reason or some sinister money backed reasons!

    1. Because everybody needs a place to live but not everybody needs a car. But, as you see from cash for clunkers etc, govt is trying to blow up people’s finances as well!

      I expect the governmentto subsidize my mortgage forever, and only more so over time bc that’s what I grew up with. Can’t fight it. Just join the movement!

  20. Sam,

    Seriously, how do you live in California? You’re pretty conservative, it seems, at least in the fiscal sense.

    Something $166,800 income limit was probably due to the losers in Congress. They earned $169,300 for being members of congress in 2008, and $174,000 in 2009. If I had the time and the dedication, I bet I could find a causal link between the median income of congressmen and women and most tax credit phaseouts. They’re a scummy bunch, you know.

  21. Sheesh, tax is a huge complicated mess. The phase out limit looks ok to me right now. From your example of someone who makes $266,800, they only lost about $1,000 of deduction. Not a huge deal right? The rule is just too complicated, no wonder everyone screw up their taxes.

  22. I find it interesting that you state that the ideal income for maximum happiness is near $200K. Income has nothing to do with happiness! Lack of income can make you very unhappy.
    Legislators in their infinite wisdom are trying to limit tax deductions for the rich. Many times, they do a bad job! The people who can afford a $1 million mortgage have access to the best tax advice to find alternative deductions. When I owned income property, I was able to shelter the income and our W2 earnings.
    Some people would like a flat tax because it is more equitable. I am very wary of any changes because of all the special interests. What makes you think it would be any better?

    1. Income has nothing to do with happiness? If you read the article on the $200,000 as the ideal income, I think you’ll prove my point that only the super rich, or those who’ve struggled to make a healthy income say “money/income has nothing to do with happiness”. Let me know your thoughts. thx.

      1. My interpretation of your article is $200K equals freedom although you describe it as happiness. The government identifies $200K as a treshold for higher taxes. They could care less about happiness. I do agree with the notion that rich people say money cannot buy happiness. Is it because there are a lot of unhappy rich people? From my perspective it is up to the individual to make him/herself happy. In my case, I could not be happy being unsuccessful. Success generally equals money. To me, money is a scorecard or measurement of success. That said,I don’t have to be a billionaire to be successful or happy.

  23. I dont even want to guess where that number came from, but I’ll do it anyway – it was probably 150-200% of median income at whatever point the law was passed, but that’s my best guess. As for the equality, typically the government doesnt give you double limits if you get married – they just give you a bit more for some reason (probably because they want someone to stay at home and raise kids, which they give you some money for).
    I hate to say it as well (because i”d like to buy a house in the future, but I think the mortgage interest deduction needs to go – it’s simply too expensive.

    1. What’s too expensive is having 45% of income earning Americans not pay any federal taxes. Now that’s too expensive. Treat people EQUALLY!

      The mortgage deduction is an option for everyone. If you want to buy a house, you get it. If you don’t, you don’t.

      1. I’m not sure where your 45% number comes from, but ALL income earners pay social security and medicare taxes. Considering the $2 trillion aggregate social security surplus was given away in tax cuts, almost all to the 1%, we are facing a challenge finding the funds to make up for that mistake. Who do you think will be asked make that up?

  24. I honestly wish that congress would get rid of the mortgage interest deduction wholesale. While it is supposed to support home ownership it only does so indirectly and unfairly. What it really supports is the mortgage industry, banks, and going into debt to buy a house. It also benefits those who make more and have more expensive houses and those who get 30 year mortgages more than those who have 15 year.

    If the government would like to support home ownership I think the first time home buyer credit was a much simpler and more direct way of doing so (fraud aside). I would be interested to see how the costs would compare to the mortgage interest deduction long-term if the program were continued.

    1. The government already offers the first time buyer tax credit.

      Given homes have gotten more expensive over the decades, I saw we raise the amount of mortgage one can deduct interest from to $2 million!

      Supporting the mortgage industry and banks is good b/c they provide HUNDREDS of THOUSANDS of jobs. We just need to do it in a more careful, less greedy way , that’s all.

      1. The first time home buyer credit has ended, about a two-year program, while the mortgage interest deduction is ongoing and has been around a lot longer.

        If we want to support the mortgage industry and banks then we should do so directly but I think you’ll find very little public support for that proposition.

        If we want to support home ownership than shouldn’t that be regardless of how someone finances the purchase of their house? The current deduction provides no benefit to those who buy in cash and paying off your mortgage early reduces your tax benefit.

        1. I’ve learned long ago not to fight the Fed and not to fight the government when it comes to making money. It’s easier to just join them.

          Better to just make $200,000 as a single person and rally against rich bad people. Better to buy a house you can afford and take advantage of all the deductions and credits and support from the gov’t then rent in the long run.

          Take advantage of the government, b/c they are taking advantage of our tax dollars on their own spending.

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