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 6.6 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. For itemized deductions to be worthwhile, they have to exceed the standard deduction, which for MFJ, is a high bar.

You can also enumerate or “itemize” your deductions, if they add up to more than the standard deduction. The 2017 TCJA tax bill, raised the standard deduction and limited the major common deductions to the following three categories. The effect was to reduce itemizing.

1.

Up to $40K total: 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 $40,000 SALT cap reflects the increase under OBBBA for 2025; the original TCJA cap was $10,000. The $40,000 amount rises slightly each year through 2029, phases down for taxpayers with modified adjusted gross income (MAGI) above $500,000, and is scheduled to revert to $10,000 in 2030.

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.