Eligible Principal

The mortgage interest D is only deductible for eligible principal up to a limit, which depends on when the loan was obtained or “originated”. The IRS has the following limits.

For mortgages taken out after December 15, 2017, you can deduct interest on up to $750,000 of qualified residence loans ($375,000 if married filing separately). For older mortgages, the limit is $1 million ($500,000 if married filing separately). This cap applies to the combined total of loans used to buy, build, or substantially improve the taxpayer’s main home and second home.

• Loans originating before 15 Dec 2017 have a $1M limit.
• Loans originating after 15 Dec 2017 have a $750K limit.

State rules may differ. E.g. California has an eligible limit of $1M for all loans. Refinancing does not change the origination date, so the limit (either $750K or $1M) remains unchanged. A refinance cannot increase the eligible principal, say from $600K to $750K by taking out cash. The eligible principal is capped at the amount of principal at the time the refinance was started. Table 6.7 gives the deductible interest assuming your principal balance is above the eligible limit during that year.

The standard deduction is shown in Table 6.1; itemizing pays only if your itemized total exceeds it, which for MFJ is a high bar. The 2017 TCJA raised the standard deduction and limited the major common deductions to the following three categories. The effect was to reduce itemizing.

1.

Up to $40,400 total in 2026: State, Local and Property tax (SALT), call this $\mathit{SLP}$

2.

Deductible mortgage interest, which is $D$

3.

Charitable deductions, call this $\mathit{CH}$

The SALT cap was $40,000 for 2025 under OBBBA — up from the original TCJA cap of $10,000 — and rises 1% a year through 2029, making it $40,400 for 2026. It reverts to $10,000 in 2030.

The SALT phase-down is a 45.5% marginal bracket. The cap does not simply disappear at high income; it grinds down, and the grind creates the sharpest hidden marginal rate in the individual Code. Above a modified adjusted gross income (MAGI) threshold of $505,000 in 2026, the $40,400 cap is reduced by 30 cents for every dollar of excess MAGI, with a floor of $10,000. Losing 30 cents of deduction per dollar earned, at a 35% federal rate, adds $0.30\times 35\%=10.5$ points to your effective marginal rate:

The band runs from $505,000 of MAGI until the cap bottoms out at $10,000, which happens once excess MAGI reaches $(\$40,400-\$10,000)∕0.30\approx \$101,333$ — so roughly $505,000 to $606,300. Inside that window every additional dollar of income is taxed at about 45.5% federal before a cent of state tax, and the dollar just above $606,300 drops back to 35%.

Plan around the window instead of trying to optimize through it. If your MAGI will land inside it, the levers that pay best are the ones that reduce MAGI directly: deferring a bonus or an NQSO exercise into the following year (section “Year-End Planning With Stock Compensation”), maximizing pre-tax retirement and HSA contributions, harvesting capital losses, and bunching charitable gifts into the years you sit comfortably above the window. If you are a pass-through owner, a state pass-through-entity tax election moves the state tax off your Schedule A entirely and out of the cap calculation — the single largest lever available, and covered in chapter “The Business Owner’s Tax Architecture”.

Example 1: You file as single, have $\mathit{SLP}=\$10K$, $D=\$20K$, and $\mathit{CH}=0$. Your itemized deductions are $10K + $20K = $30K which is larger than $\mathit{STD}$=$16,100 for 2026. You itemize and get $30K - $16,100 $\sim$ $14K more deductions than the standard deduction. Thus, $14K of your $20K mortgage deduction or 70% was “effective”.

Example 2: You file as MFJ, have $\mathit{SLP}=\$10K$, $D=\$25K$, and $\mathit{CH}=0$. Your itemized deductions are $10K + $25K = $35K which is larger than STD=$32,200 for 2026. You itemize and get $35K - $32,200 $\sim$$3K more deductions than the standard deduction. Thus, only $3K of your $25K mortgage deduction or 12% was “effective”.

General Analysis When your itemized deductions exceed your standard deduction, $\mathit{SLP}+D+\mathit{CH}>\mathit{STD}$. Solving for D, we have $D>\mathit{STD}-\mathit{SLP}-\mathit{CH}$. The “break even” mortgage deduction $D_{\mathit{BE}}$ is where itemizing is the same as $\mathit{STD}$ is $D_{\mathit{BE}}=\mathit{STD}-\mathit{SLP}-\mathit{CH}$. Only the mortgage deduction D greater than D_BE reduces your taxes. In particular, if filing MFJ, $\mathit{STD}-\mathit{SLP}-C=\$22,200$ in 2026, if $\mathit{CH}$ is zero, then the first $D_{\mathit{BE}}=\$22,200$ of your mortgage deduction is not effective in reducing your taxes, as you are still under the standard deduction.