Your Guide To Understanding The Mortgage Interest Deduction

If you itemize your federal income tax deductions instead of taking the standard deduction, you’ll want to take advantage of the mortgage interest deduction. This deduction allows you to deduct any interest paid on your mortgage annually.

However, the rules surrounding the mortgage interest deduction can be confusing. This article will explain how the deduction works, and exceptions you should know about.

What Is The Mortgage Interest Tax Deduction?

The mortgage interest deduction allows homeowners to reduce their taxable income based on the interest paid on their home loan in a given year. This itemized deduction helps homeowners save on the amount of taxes they owe.

It’s available to borrowers who itemize their federal income tax deductions, and most types of home loans qualify for the deduction. The mortgage interest tax deduction can make homeownership less of a financial burden, especially if you took out a large mortgage.

Mortgage Interest Deduction Limit

How much interest you can deduct from your mortgage really depends on the tax year when you bought your home. If you’re married and filing jointly, you can deduct interest from your home mortgage on the first $750,000. However, if you bought your home before Dec. 16, 2017, you can deduct the interest paid on the first $1 million in mortgage debt.

Mortgage Interest Deduction Qualifications

According to the IRS, before you can claim the mortgage interest deduction, your loan must be secured by a qualified home. A qualified home is either your main home or your second home. However, there are other costs and fees you may be able to deduct:

• Interest on the mortgage for your main home: You can deduct the mortgage interest paid for your main home, which is the home you live in the majority of the time.
• Interest on the mortgage for your second home: You can also deduct the mortgage interest paid on your second home you don’t rent out. If you rent out the home, you must use it more than 10% of the time it’s rented out.
• Paid mortgage points: If you bought mortgage points to lower your interest rate, you can deduct a portion of these that same filing year.
• Late payment charges: If you make a late payment, you may be able to deduct the late fee you’re charged.
• Interest on a home equity loan: If you took out a home equity loan to pay for a home renovation project, you can deduct any interest paid on the amount you spent upgrading your property.
• Mortgage insurance premiums: For the 2021 tax year, you can deduct private mortgage insurance premiums on your mortgage interest deduction.

What Is Not Deductible?

The following costs do not qualify for mortgage interest tax deductions:

• Homeowners insurance
• Appraisal fees
• Notary fees
• Deposits or down payments
• Closing costs
• Any additional payments put toward principal
• Home equity loan interest that wasn’t used to upgrade your property

Mortgage Interest Exceptions

There are some special circumstances you’ll need to know about regarding the mortgage interest deduction. For instance, if you own a co-op apartment, you can deduct your share of the interest paid on the building’s mortgage.

And if you rent out a portion of your home, you can still consider the rented portion as part of your living space. You can do this as long as the rented portion doesn’t have separate sleeping, cooking, and bathroom facilities.

And finally, if you were divorced or separated and either you or your ex made payments on the mortgage, one person can claim half the payments made. The other person must claim their half as alimony.

How To Claim The Mortgage Interest Deduction

To claim the mortgage interest deduction, you’ll start by deciding whether you’ll choose the standard deduction or itemized deductions. The IRS recently provided updated guidance on the standard deduction for 2022:

• $12,950 for single taxpayers and married individuals filing separately
• $25,900 for married couples filing jointly
• $19,400 for heads of household

If your itemized deductions add up to more than the standard deduction, taking it may be the obvious choice. However, it’s a good idea to consult with a tax professional for further guidance.

Once you’ve decided to itemize your deductions, you’ll complete the Schedule A on Form 1040. Your reported mortgage interest will be reported on line 8a, and mortgage insurance premiums will be reported on 8d.

Deducting Mortgage Interest FAQs

Can I deduct mortgage interest?

Yes, as a homeowner, you can deduct your mortgage interest payments on your tax return. This deduction can help you lower your taxable income, but it’s only available to taxpayers who itemize their deductions.

What are the limits on mortgage tax interest deductions?

If you purchased your home prior to Dec. 16, 2017, you can deduct the interest paid on the first $1 million in mortgage debt. For a home purchased after that date, you can deduct interest paid on the first $750,000.

Is there a mortgage deduction for home equity loans?

Yes, if you take out a home equity loan, you can deduct the interest for money spent upgrading your home. However, you can’t deduct the interest spent on non-home related purchases.

The Bottom Line

The mortgage interest deduction can be a good way for homeowners to lower their taxable income and the financial burden of owning a home. However, this deduction will likely be the most beneficial for individuals in higher tax brackets.

If you prefer to take the standard deduction, there are other ways you can lower your costs as a homeowner. For instance, refinancing can help you lower your interest rate and save money over the life of the loan. If you’re interested in learning more about refinancing, take the next steps to get approved online today.