Mortgage interest

[MikeG60]

My wife and I got married in 2020. We had some real estate transactions in 2020 to bring us together.

i bought my condo in 9/2017 and sold 3/2020. $300k mortgage remained and $4k interest paid in 2020

my wife bought her house in 6/2017 and sold in 3/2020. $700k mortgage remained and $6k interest paid in 2020

we bought a house together in 4/20. $1.1m loan and paid $18k in interest in 2020.

$13k in combined real estate tax paid

1 dependent child

combined income $600k split $400k and $200k.

Keeps giving me the standard 24.8k deduction. Haven’t dug in to see if it’s recognizing the interest. 

thinking of looking at result of filing married separate if that might help?

[Carl]

Until the total of all of your SCH A itemized deductions exceed your standard deduction, the itemized deductions have absolutely no impact on your tax liability.

Some of your deductions are limited. For example, you are limited to a total of $10K for SALT (State and Local Taxes). So chances are your itemized deductions will not exceed your standard deduction.

thinking of looking at result of filing married separate if that might help?

Won't help at all. When a married couple files separate, your SALT limits are cut in half for each of you.

1 dependent child

When a married couple files separate, you both "automatically" lose deductions you would otherwise qualify for if you filed joint. One of the deductions you both lose is the dependent child care credit, among many others.

we bought a house together in 4/20. $1.1m loan and paid $18k in interest in 2020

Only the interest paid on the first $700K of the loan is deductible on SCH A. That will be reduced even more on that particular loan because it's the first $700K on all of your home loans combined.

Also, if you file separate, if one of you takes the standard deduction, then the other must also take the standard deduction; even if itemized deductions would be higher for one of you.

Likewise, if one of you itemizes deductions then you must both itemize deductions; even if the itemized deductions of one of you would be zero.

Bottom line is, filing separate returns is a lose-lose situation all the way around.

[MikeG60]

Thanks!

so my total loans are $2.1m for the 3 places. At 750k limit only can recognize 35% of total interest. So that’s 35% of $28k or about $10k plus about $10k re taxes which is less than the standard.

plus we’re probably have more income subject to the 0.9% Medicare tax now that it is on a combined income over $250k.

Divorce is not an option 🙂  - seems like we’ll just need to resign fact that taxes will be higher combined unless there are other solutions.

[Carl]

plus we’re probably have more income subject to the 0.9% Medicare tax now that it is on a combined income over $250k.

Unless there's some income threshold I'm not aware of, rental income is passive and is therefore not subject to the medicare or social security tax. (I may also be confusing your statement with self-employment tax, so take it with a grain of salt at this point.)

[Anonymous_]

Rental income that is treated as passive income is subject to the net investment income tax (NIIT).

See https://www.irs.gov/individuals/net-investment-income-tax

[NCperson]

I see a lot of posts where TT struggles to calculate interest when there are multiple 1098's involved and folks struggle to understand 'average loan balance'.

"average loan balance" is determined by

1) taking the interest for the year on a specific mortgage and dividing by its interest rate.  THAT is its average. 

2) sum up each average (you have three of them) and THAT is your average for the year.  

You don't simple take a two point average of the three mortgages which is going to overinflate the average mortgage which reduces the deductible interest

see publication 536 page 13  and read the middle column 

https://www.irs.gov/pub/irs-pdf/p936.pdf

[MikeG60]

Thanks - that would bring the average significantly down to about $1m (18k/.025+ 4k/.035 + 6k/.0325) so can recognize approx 75% of the interest (750k/1m) which is $21k (28k*.75). If I add 10k re tax I am back to not understanding why the itemized of 31k is not better.

[NCperson]

why do you think the itemization of $31k is not better? 

ps. next year the deductible interest is quite an easy calculation: $750,000* interest rate. Done.

[MikeG60]

I think it is better but TT keeps saying The standard deduction is better. I guess I need to change the outstanding loan amounts in each entry to be ‘interest/interest rate’ so totals to the $1m 

agree next year better