Why is actual tax deduction rate on mortgage interest much lower than pre 2018 tax reform?

[GrantS]

I've always filed married jointly and my household income is in 33% income tax bracket. I have a $450,000 mortgage refinanced on Sep 2017 on my main home(I only have one home) .

I noticed that before 2018, if I enter $10,000 mortgage interest in TurboTax, the Fed tax due reduces by about $3,300.  The actual tax deduction rate on the mortgage interest($10,000) matches my 33% tax bracket. This is true for tax year 2017,2016,2015 ... all the way back.

But in 2018 and 2019 tax return(after tax reform), my household income remains pretty much the same that leaves me in 32 % tax bracket.  If I enter $10,000 mortgage interest in TurboTax, the Fed tax due only reduces by about $1,200. The actual tax deduction rate on the mortgage interest($10,000) is about 12%. This is much lower than my income tax bracket 32%.

I can't find any information on why it is like this. My mortgage situation seems to be eligible for fully deductible interest. Did I do something wrong or not aware of some of the new tax rules? My state is CA if that helps.

Thank you for any help you can provide!

[xmasbaby0]

HOMEOWNERSHIP DEDUCTIONS

It is very hard for a lot of people to use itemized deductions now that the standard deduction is so much higher.  Your home ownership may not have any effect on your tax due or refund, especially if you purchased the house late in the year.  

Standard Deduction
Your itemized deductions have to be more than your standard deduction before you will see a change in your tax owed or tax refund.  The deductions you enter do not necessarily count “dollar for dollar;” many of them are subject to meeting  tough thresholds—medical expenses, for example, must meet a threshold that is pretty hard to reach.  The software program uses all the IRS rules that apply to the expenses you enter, and it tells you if you have enough to use your itemized deductions or if using the standard deduction is more advantageous for you.  Under the new tax laws, some deductions have been capped—there is a $10,000 limit to the itemized deductions for state, local, property and sales taxes. 

2019 Standard Deduction Amounts

Single $12,200   (+ $1650 65 or older)

Married Filing Separate  $12,200   (+ $1300 if 65 or older)

Married Filing Jointly $24,400   (+ $1300 for each spouse 65 or older)

Head of Household $18,350  (+ $1650 for 65 or older)

https://ttlc.intuit.com/questions/2926910-why-didn-t-my-refund-change-when-i-entered-my-mortgage-int...

[GrantS]

Thanks xmasbaby0! I spent sometime playing with TurboTax and found something very interesting. I removed the existing mortgage interest and entered a new one with amount of $100, the Fed tax due number did not change at all!  The CA tax due however immediate went down for $9 (which matches my CA tax bracket).  Then I kept raising the mortgage interest amount to $200,$300....$1000.....  The Fed tax due did not go down until the mortgage interest reaches around $6,000. It turns out the first $6,000 of my mortgage interest is not deductible. This is true on both 2018 and 2019 return.  Once it passes $6000, say if I enter $7000($1000 above the threshold), I will have a Fed tax reduction of $320 which matches perfectly to my Fed tax bracket of 32%.

For 2017 and earlier(before the tax reform), there is no "threshold", the moment I enter the first $100 of mortgage interest, the Fed tax due will go down at the rate of my Fed tax bracket.  

So 2017 and before, the mortgage interest is a dollar for dollar deduction for me. After tax reform, only the portion above the threshold(about $6000) is a dollar for dollar deduction.  What puzzles me is that I can not find any IRS publications explains why it works like this or how the threshold is calculated. TurboTax also do not provide any worksheet shows how is it calculated. Can you point me to the right direction? Thanks in advance!

[xmasbaby0]

@Carl     ?  This sounds up your alley....

[SteamTrain]

@GrantS 

Another thing you might do is

1)  change the mortgage interest back to $1000,  then $5000 and check line 9 of the form 1040,

2)  then back to $7000 and check line 9 again...

3)   what's the value of line 9 for each of those settings.

I have a suspicion you  are in Std Deduction territory on the Federal tax return with the lower $$ amounts, and just don't realize it.

[GrantS]

Thanks SteamTrain! You have nailed it!  I did the tests you suggested, for mortgage interest amount entered from $0 to $6000, line 9 remained the same at $24,400(Standard Deduction for married filing jointly!)  

Once the mortgage interest passed the "threshold"($6000), line 9 starts to change dollar for dollar for the mortgage interest amount above the threshold. So the threshold is really the amount that Itemized Deduction starts to save more than Std Deduction.

The mortgage interest is still dollar for dollar deducted. Just when I chose to do Itemized Deduction, TurboTax displayed the Fed tax due based on Std Deduction until the Itemized Deduction started to save more than the Standard. The "threshold" and lower than expected savings on tax due is just an "illusion" from how TurboTax displayed the Fed Tax due based on Std Deduction first. Basically TurboTax was safeguarding me with savings from the Std Deduction.

Thanks again for everyone's help for me to understand this! This will be very useful for my future tax planning and filing. Maybe in the future TurboxTax can display some notes next to the Fed tax due and let people know the good stuff behind it and avoid confusions.

[Carl]

I see Steamtrain nailed it. TO be honest, I don't think I would have figured it out as fast as he did. 🙂