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Definition

Under prior law, in addition to being allowed to deduct 100% of state and local income (or sales) taxes, homeowners could deduct 100% of their state and local personal property taxes. In other words, there was previously no limit on the amount of personal (nonbusiness) SALT deductions you could take, if you itemized. You also had the option of deducting personal state and local general sales taxes, instead of state and local income taxes (if you owed little or nothing for state and local income taxes).

Under the TCJA, for 2018 through 2025, itemized deductions for personal SALT amounts are limited to a combined total of only $10,000 ($5,000 if you use married filing separately status). The limitation applies to state and local 1) income (or sales) taxes, and 2) property taxes.

Source :https://mwcpa.com/tax/saltdeductions/

My Situation

  • I own a home in California, USA
  • Property taxes are ~$9,000 per year
  • In 2012, I got a 15 year fixed rate 2.5% interest mortgage
  • Mortage payment is $1,900 per month.
  • 8 years left on the mortgage.
  • When filing taxes in April 2018, I was able to deduct > $40,000.
  • When filing taxes now in 2019, I am only able to deduct $10,000.

Question

My mortgage interest of 2.5% was the lowest in US history, so it was advantageous for me to have a mortgage, such that I could reinvest the leftover money in the stock market, which typically returns more than 2.5% annually. Now that TCJA cut the SALT deduction all the way to 2025, I am bleeding money to the interest payment. Should I pay off my entire mortgage today?

  • 2
    Tell us in more detail how that $40K deduction on your 2017 return came about; how much of it was SALT deduction and how much of it was PEPPER (mortgage interest, charitable donations, medical deductions, misc deductions subject to 2% floor, etc). If you are married, you get a standard deduction of $24K, right? So how much of a hole will you actually be in in 2018? – Dilip Sarwate Mar 9 at 22:28
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    The SALT cap has nothing to do with your mortgage interest. There is a separate cap applied to deduction of mortgage interest, but you're grandfathered. Ahh, I see -- because of the SALT cap you will no longer itemize, which effectively means that you pay your interest with funds that have federal tax paid, where before it was not. – Ben Voigt Mar 10 at 3:25
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You can get 5-year CD's at ~3.1% and, as you mentioned, you have been earning more than 2.5% in the market generally. So, on one hand with a rate so low there is little motivation to pay it off early, on the other, having no more mortgage feels nice. It's just a question of what you're comfortable with, you can most likely earn more than 2.5% over the next 8 years. Normally I wouldn't entertain borrowing to invest, but at 2.5% it starts to sound pretty compelling.

The tax changes have little bearing on this decision, you were getting, in essence, a slight discount on an already low interest rate, now you're getting less/no tax benefit from it, so the figure to beat moved up slightly, that's it.

  • I agree 100% and heck in 5 years you might make 5% in a CD. 2.5% interest is like a free loan thanks to inflation. I would never give that up or even my 3.125% loan. – Mark Monforti Mar 10 at 1:23
  • Of course he will be paying tax on the CD gains (probably ~40% in Cali), so a 3.1% APY will lose ground against the mortgage interest. – Ben Voigt Mar 10 at 3:26
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    @BenVoigt It's true, a mix that includes CD's is what I pictured. It shouldn't be too hard to beat 2.5%, but couldn't do it with CD's alone at current rates. – Hart CO Mar 10 at 4:33
  • I forgot to add that I’m in a flood zone, so my mortgage requires me to pay ~$800 a year to FEMA for flood insurance. Southern California gets very little rain, so I could possibly dump the flood insurance if I didn’t have the mortgage. I’d need an investment that pays at least $800 + 2.5% + income tax list on the 2.5%. – JoJo Mar 10 at 17:45
  • @JoJo By your numbers it looks like you have ~165k left on your mortgage, so that $800/year requires 0.5% return to cover, a bit more with tax factored in. However, flood insurance does have value, you may never benefit from it, but not having it could be very costly. – Hart CO Mar 10 at 17:49

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