California lets you deduct more mortgage interest on your State return than Federal if you bought your home in 2018 or later
The mortgage interest deduction is a tax benefit that allows homeowners to deduct the interest they pay on their home loans from their taxable income. This deduction can reduce the amount of income tax they owe, and thus encourage homeownership.
However, the federal tax law that took effect in 2018 changed the rules for the mortgage interest deduction. The new law limited the deduction to interest on up to $750,000 ($375,000 for married filing separately) of home acquisition debt, which is the debt used to buy, build, or substantially improve a home. This limit applies to loans taken out after December 15, 2017. The previous limit was $1,000,000 ($500,000 for married filing separately).
The new law also eliminated the deduction for interest on home equity debt, which is the debt used for any other purpose than buying, building, or substantially improving a home. The previous law allowed a deduction for interest on up to $100,000 ($50,000 for married filing separately) of home equity debt.
The state of California, however, does not conform to the federal law.
California still allows taxpayers to deduct interest on loans up to $1,000,000 ($500,000 for married filing separately) of home acquisition debt, regardless of when the loans were taken out. California also allows a deduction for interest on up to $100,000 ($50,000 for married filing separately) of home equity debt.
This means that California taxpayers who itemize their deductions may be able to claim a larger mortgage interest deduction on their state tax return than on their federal tax return. For example, if a taxpayer has a $900,000 home acquisition loan and a $50,000 home equity loan, they can deduct the interest on both loans on their California tax return, but only the interest on the first $750,000 of the home acquisition loan on their federal tax return.
To claim the mortgage interest deduction on their California tax return, taxpayers need to make an adjustment to their itemized deductions. They need to add back the amount of interest that was disallowed on their federal tax return due to the lower limit or the elimination of the home equity debt deduction. They can find this amount by comparing the total interest they paid on their loans with the amount they reported on their federal Schedule A. Alternatively, they can use the Deductible Home Mortgage Interest Worksheet provided by the IRS to calculate the amount of interest that was disallowed.
The mortgage interest deduction is one of the most common tax deductions for California homeowners. By not conforming to the new federal law, California preserves this tax benefit for its taxpayers and maintains its own tax policy. However, this also creates a difference between the federal and state tax law that taxpayers need to be aware of and adjust for.
Moontree Tax Service can calculate the mortgage interest deduction to file your tax return using Itemized deductions on Schedule A. Contact us today to schedule an appointment or to upload your documents for tax return preparation.
