Use all of your itemized deductions so that they are greater than the Internal Revenue Service’s standard deduction to get the most out of your mortgage interest tax deduction. You are unlikely to claim the mortgage interest deduction unless you have a high income because the federal standard deduction is so high. The higher your income and the bigger your mortgage, up to the $750,000 maximum, the bigger the tax break you’ll receive if you do claim the deduction.
What does the interest on a mortgage mean?
Mortgage interest paid on the first $1 million of mortgage debt is tax deductible under the mortgage interest deduction. After December 15, 2017, homeowners can deduct interest on the first $750,000 of their mortgage. It’s necessary to itemize on your tax return in order to claim the mortgage interest deduction.
Here is a look at how it functions and how you can make savings during tax season.
How to Calculate the Mortgage Interest Deduction
The mortgage interest deduction allows you to write off only the interest you pay on your mortgage, not the principal.
Say you have a $1,500 monthly mortgage payment. You cannot take a $1,500 deduction. You can see from your mortgage statement that maybe $500 of your payment goes to principal and $1,000 to interest. You can deduct the first $1,000 of that amount.
As more of your monthly payment is applied to principal, the amount of interest you pay each month gradually lowers. As a result, instead of $12,000, your annual mortgage interest payment may be closer to $11,357 or $12,892.
The same $1,500 payment may go toward principal and only $500 toward interest in the later years of your mortgage. You save more money in the beginning thanks to the mortgage interest deduction.
What Can Be Deducted for Mortgage Interest?
The mortgage interest deduction is available on all of your monthly payments, not just the interest portion. Deductions for discount points, late payment fees, and mortgage insurance premiums may also be permitted.
The points you spend to lower your mortgage interest rate may be tax deductible in the year you make the payment or proportionately over the course of the loan. The same applies to points paid by the seller when you purchase a home as well as points on a home equity loan or HELOC whose proceeds you use to construct, purchase, or significantly improve your home.
However, you cannot deduct points paid on a second house mortgage in the year you make the payment; instead, you can only do so throughout the course of the loan. Over the course of the loan, refinancing points typically also need to be subtracted.
Mortgage insurance costs are tax deductible alongside mortgage interest in 2019 and 2020. All types of mortgage insurance are acceptable, including private mortgage insurance, FHA mortgage insurance premiums, FHA upfront mortgage insurance, VA financing fees, USDA guarantee fees, and UDSA’s annual mortgage insurance.
However, this deduction phases out for taxpayers who are married filing jointly and have an adjusted gross income (AGI) of $100,000 or more, as well as for taxpayers who are single or married filing separately and have an AGI of $50,000 or more. You can no longer deduct mortgage insurance when your AGI hits $109,000 ($54,500).
How to take the interest on a mortgage deduction
You must perform the upcoming actions.
1. Look for Form 1098 in your mailbox.
You receive a Form 1098 from your mortgage lender in early January or February. It provides information about your mortgage interest and point payments made during the tax year. The IRS receives a copy of that Form 1098 from your lender and will attempt to compare it to the information you disclose on your tax return.
If you paid the lender $600 or more in mortgage interest (including points) throughout the year, you will receive a 1098. (Read more here about Form 1098.) Your lender’s monthly bank statements may also contain information on mortgage interest rates for the entire year.
2. Maintain accurate logs. The good news is that, under certain conditions, you could be able to deduct mortgage
Interest in the following situations:
- You utilized a portion of the home as your workplace (you may need to fill out a Schedule C and claim even more deductions).
- You owned a cooperative apartment.
- A portion of your house was rented out.
- It was a timeshare property.
- Throughout the year, the home was being built in part.
- You invested in a business, paid down debt, or did anything else with the mortgage funds that had nothing to do with purchasing a home.
- Throughout the year, your house was devastated.
- If you and your ex-spouse were divorced or separated, one of you must pay the mortgage on the house you both own (the interest might actually be deemed alimony).
- You were responsible for and made mortgage interest payments on your home with someone who is not your husband.
- The bad news is that the regulations become increasingly intricate. For more information, go to IRS Publication 936 or speak with a certified tax advisor. Keep track of the total square footage, as well as which costs and income can be attributed to which areas of the house.
3. Submit itemized tax returns.
You claim the mortgage interest deduction on Schedule A of Form 1040, thus when filing your taxes, you must itemize rather than use the standard deduction.
That might also entail spending more time on tax preparation, but if your itemized deductions will save you more money than your standard deduction, you should still itemize. Take the standard deduction to save time if it is more than your itemized deductions, which include your mortgage interest deduction. (Learn more about taking the standard deduction vs. itemizing.)
You are able to compute your deduction using Schedule A. You can follow the procedures using your tax preparation program.
4. Examine your eligibility for special deduction regulations.
You might be able to deduct all of your mortgage payments for the year if you received assistance from a state housing finance agency “Hardest Hit Fund” program or an Emergency Homeowners’ Loan Program (administrated by the state or the Department of Housing and Urban Development).
To sum up
If you have a high income and a large mortgage, the mortgage interest tax deduction may make borrowing money to buy a home slightly less expensive. The deduction is not a justification for taking out a mortgage or continuing to pay off one that you already have. It’s also generally not a justification for going over your home-buying budget.
The standard mortgage interest tax deduction rules have many exceptions, but the information provided above should help the majority of people determine whether they qualify for and will benefit from this deduction.