See if you qualify for a mortgage interest deduction
There are a lot of unavoidable costs that come with owning your home — mortgage payments, homeowners insurance, property taxes, etc. But crafty homeowners across the country find ways to reduce their financial obligations and make buying and maintaining a house more affordable.
Tax deductions are some of the most popular financial tools people use to maintain a positive cash flow. Contrary to popular belief, you don’t need to be an accounting wizard to take advantage of these opportunities. Case in point: Some homeowners claim mortgage interest deductions to pay less in income tax each year. Is this a viable option for you? Let’s take a look at how mortgage interest deductions work to find out.
What is a mortgage interest deduction?
No matter what tax bracket you’re in, you likely have plenty of opportunities to deduct certain everyday expenses from your taxable income. For instance, many companies offer programs that allow employees to set aside money from their paycheck to cover retirement or transportation costs. These funds are not counted toward your total taxable income, in effect helping you pay less in taxes each year.
Mortgage interest deductions work the same way, except they apply to the interest you pay on your mortgage. You’ll still have to pay your interest in full each month, but you can deduct the same amount from your total taxable income.
To take advantage of a mortgage interest deduction, you’ll need to itemize your tax returns. Depending on your specific circumstances, taking the standard deduction may be the best way to lower your income taxes, but in other cases, a mortgage interest deduction will be well worth your while.* Whenever you’re dealing with taxes, it’s always a good idea to consult a professional who specializes in this area. That way, you can be sure you’re making the most informed decision possible.
How much can you claim on your mortgage interest deduction?
The maximum limit on mortgage interest deductions is $750,000. The government actually lowered the limit in 2018; before then, it was set at $1 million. Note that $750,000 refers to the principal balance or loan amount itself, not the amount of interest paid on that loan. As such, some homeowners may find that you can claim all of the mortgage interest you pay as a tax deduction.
That doesn’t always mean that claiming a mortgage interest deduction is the best course of action, though. The same legislation — the Tax Cuts and Jobs Act (TCJA) — that lowered the maximum limit also significantly increased the standard deduction. And as we said earlier, you’ll need to itemize your taxes to capitalize on mortgage interest deductions. Instead of just clicking the “standard deduction” option on your tax returns, you’ll have to upload information, receipts and financial documents relating to every deduction you want to claim. In addition to mortgage interest, that may include charitable donations, work-related expenses and certain healthcare costs. When you crunch the numbers, you may well find that you don’t have enough other deductions for that tradeoff to make sense.*
Confused? When in doubt, talk to a tax advisor who deals with these questions every day. They’ll be able to review your finances and let you know which way to go.
What is (and isn’t) deductible?
Even seasoned CPAs get tripped up by the tax code every now and then, so don’t beat yourself up too much if you’re confused about the finer details of income taxes. You might expect that mortgage interest deductions would be (relatively) straightforward, but not all home loans are applicable. Here’s a rundown of what’s deductible and what’s off-limits:
- Mortgage interest paid on a primary or secondary residence
- Interest paid on a home equity loan used specifically for home renovations and repairs
- Interest paid on a home equity line of credit (HELOC) also used for home improvements
- Late payment fees (although the cost of late payment penalties will almost certainly outweigh the savings from any tax deduction)
- Mortgage interest paid on any property you own beyond your first two homes (if you have multiple vacation properties, you’re going to have to make some tough choices)
- Interest paid on home equity loans used for other purposes like buying a car or consolidating debt
- Interest paid on HELOC loans used for anything other than home improvements
- Your mortgage principal
- Homeowners insurance
- Title insurance
- Closing costs like origination fees
- Mortgage points used to lower your interest rate
You might be wondering, “What happens if I sell my house? Can I still claim any interest payments I made on my taxes?” Yes! Any interest you paid during that tax year would be eligible for a mortgage interest deduction.
How do you qualify for a mortgage interest deduction?
In some cases, you’ll find that, as a homeowner, you’re able to claim mortgage interest deductions.* There are just a few boxes you need to check off to qualify:
- You need to be the borrower or co-borrower on your home’s mortgage. If your home loan is only in your spouse’s name, then you probably won’t be able to claim a tax deduction yourself. That’s assuming you’re filing separately. Even if you’re contributing to your mortgage payments each month, your lender needs to recognize you as a borrower or co-borrower on your loan. That also holds true if you help friends and family members out with their mortgages. You can’t claim those interest payments on your taxes.
- You need to itemize your tax returns. You’ll only be eligible for these and other tax deductions if you itemize your returns rather than take the standard deduction. It’s fair to say that if your only deduction is on your mortgage interest, then it’s probably not worth the effort. Regardless of which way you may be leaning, be sure to talk to a tax advisor who can review your financial situation and help you minimize your tax burden.
- Your mortgage needs to be a secured loan. That is, your house must serve as the collateral on your home loan. Seeing as all mortgages are, by definition, secured loans, you don’t have to worry about meeting this criteria.
How tax code changes have impacted mortgage interest deductions
Tax code changes that have gone into effect in recent years have impacted tax deductions across the board. As we noted before, mortgage interest deductions were one of the key areas covered by TCJA. Unlike other exemptions and credits, mortgage interest deductions were not eliminated entirely. But there was one major change that you should be aware of if you’re going to claim this kind of tax deduction: your mortgage limit.
You may recall that TCJA lowered the ceiling for mortgage debt you could claim interest on from $1 million to $750,000. For spouses filing separately, that figure went from $500,000 before TCJA to $375,000. Keep in mind that only applies to home loans that originated after Dec. 16, 2017. If you took out a mortgage before that date, then the original limits still apply.
The degree to which these changes will impact your eligibility or potential savings will depend on a number of personal and financial factors that are, frankly, too numerous to list here. Your best bet is to speak with a tax expert who can walk you through your options. In many cases, though, you may find that simply taking the standard deduction is not only the easiest way to go, it could also be the most effective way to lower your tax burden.* That’s especially true since TCJA actually increased the standard deduction in addition to all of its other tax code updates.
Also, TCJA has an end date, so these changes won’t last forever. TCJA is set to expire once the clock strikes midnight on Jan. 1, 2026. That’s assuming the government doesn’t extend these tax code updates, which it very well may. All the more reason to consult a tax pro who stays on top of all the latest developments in this complicated, ever-evolving subject.
Follow these 3 steps to claim your tax deduction
Let’s say you spoke with a tax advisor who assured you that claiming a mortgage interest deduction is the best option for you. What’s next? Follow these three steps to file your taxes with a mortgage interest deduction:
- Make sure you have your 1098 form. Just as your employer will send you a copy of your W2 paperwork every year before tax season, your mortgage lender should share with you a 1098 form. This document details how much you’ve paid toward your home loan over the course of the previous tax year. You’ll only receive a 1098 form if you paid more than $600 in interest. Of course, if you paid less than that, then a mortgage interest deduction probably wouldn’t be your best course of action.
- Itemize your tax returns. You won’t be able to submit your mortgage interest deduction if you choose to take the standard deduction. So, when filing our taxes, be sure to select the option to itemize your returns. Again — and we can’t stress this enough — do your due diligence beforehand so you’re absolutely sure that itemizing will net you a better return than the standard deduction. Remember, it’s unlikely that the mortgage interest deduction alone will tip the scales in favor of itemizing. You’ll probably need a bunch of other deductions to make it worthwhile.
- Complete Form 1040. Also known as “Schedule A,” Form 1040 is the document you’ll need to fill out to itemize our tax returns. This should be a relatively straight-forward affair, as you simply need to copy and paste the appropriate information from your 1098 form. The IRS has a good breakdown of all the info contained on a standard 1098 document and, more importantly, what you as a borrower and taxpayer should do with those figures.
If you’ve itemized your tax returns in the past, then this should all be a breeze. Even if this is your first experience claiming itemized deductions, you shouldn’t run into any major problems as long as you have that 1098 form by your side.
Mortgage interest deductions give homeowners an opportunity to reduce your tax burden by claiming the interest you’ve paid on your home loan on your tax returns. Unless you already have a bunch of other deductions to make, however, taking the standard deduction may be more cost-effective.*
Without years of experience preparing tax returns as a professional accountant, you’re probably not going to know which option makes the most sense. That’s why it’s always recommended you work with a tax advisor who can look over your finances, assess your tax situation and give you an informed opinion on the best way to proceed.
*Guaranteed Rate does not give tax advice. Ask any tax related questions to your chosen tax professional.