The mortgage interest deduction is a tax break for homeowners who take advantage of it. However, it is most helpful for first-time homebuyers and investors looking to acquire real estate as a long-term investment. If you have substantial home equity, the deduction is even more beneficial.
If you are a homeowner and itemize your deductions, the mortgage interest deduction is one that you should be taking advantage of. The maximum interest claimed is $750,000, but interest on any home can be deducted.
How does mortgage interest deduction apply?
You can deduct up to $1 million in interest from your taxes, so keep track of every penny you’ve paid. Remember that the mortgage interest deduction (Click here) is not meant to be used as a tax shelter. The full extent of the mortgage interest deduction isn’t available to everyone.
The deduction is available only on the interest portion of the loan, not the principal. The interest on a home loan is reported as interest each month, and you can use that information to figure out how much you’re paying in mortgage interest each year. The amount of interest you paid in a given year can be used to reduce your taxable income for that year.
The $750,000 exception only works if you bought the primary home or a second home after Dec. 15, 2017. If you purchased a primary home that was not previously your primary home and converted it into a second home, you would have to choose one home as the primary and the other as the secondary.
Eligibility for the mortgage interest deduction
- The IRS now allows you to deduct interest on a home as a business expense if you are the primary homebuyer. The home is used as the primary place of business for the business (e.g., a bar or restaurant).
- As long as the property is for mortgage purposes, it is considered a home. However, it does not matter if the property is a one- or two-family house, co-op, or apartment if the mortgage is on the property as a home.
- If you have a mortgage or other loan on the place and are using it as a primary residence, you may be able to deduct the interest you paid on loan. You can also deduct interest on the loan if the property is being used as ten percent of more rental time.
- It would help if you also had a valid mortgage before claiming this deduction. If you buy a primary residence, you can deduct the entire purchase price on your return. However, if you are refinancing a home or taking out a second mortgage, you cannot deduct the interest on the new loan.
- However, if you are an active-duty member of the U.S. armed forces, receive a nontaxable housing allowance from the military, or are covered by a federal housing assistance program, you do not have to include housing mortgage interest as income on your tax return. If you pay for a home with a nontaxable housing allowance, you can still deduct the interest you paid on the home.
- While a penalty is generally imposed when you miss a payment or otherwise cause a default on your mortgage, you can still get a penalty if you pay it off early. However, you can still take this deduction if you showed that you had a good cause.
- The number of points you can deduct will depend on your place of residence at the end of the year. Most mortgages are fixed, meaning interest rates do not fluctuate. If your mortgage rate changes, you can still deduct the change in interest. However, be careful if the rate drops during the year. If you have a variable interest rate on your mortgage, you may be able to claim a loss on your taxes if you had to adjust your loan to lower your interest rate.
When will mortgage interest deduction not apply?
- Homeowners insurance is one of the most critical financial investments you make. Don’t be surprised if your insurance company rejects your claim because they do not offer homeowners insurance.
- Closing costs are generally not deductible by an individual as a business expense. If a company files a return and a business cannot expense these costs, they are not deductible. These costs will be reported as an expense on the business’s income statement and must be paid when the costs are incurred.
- If you are on active military duty, lodging, transportation, and other miscellaneous expenses are not tax-deductible.
- Similarly, you can’t deduct the amount that has been prepaid or forgiven.
The main ways that you can take advantage of the mortgage interest deduction in 2023 include:
- The standard deduction is not tied to your income, so it’s an excellent way to cover your bases if you have a high deductible lifestyle. The standard deduction is also the same no matter your age, so it’s an excellent way to make sure you’re covered if you’re starting.
- For example, a single taxpayer with an adjusted gross income of $200,000 or more would be able to deduct just $12,500 of their income.
- The standard deduction may be higher, such as for a married couple filing jointly who earn $25100 or more.
- For the 2023 tax year, the standard deduction for a married couple filing separately is $12,550.
- The standard deduction is also available for a maximum of $18800 for household heads.
Keep in mind that itemizing deductions greatly reduces your total taxable income, which will help you reduce your tax bill. Even if you don’t itemize, you can still take advantage of the reduced rates on your taxable income by taking advantage of deductions such as mortgage interest, charitable contributions, and medical expenses.
Filing the form for the mortgage deduction
Like most people, you probably received a 1098 Form from your mortgage lender or mortgage servicer in the mail, but don’t worry if you didn’t. You can still receive a copy of the form by contacting the company. You’ll need to provide the form to your tax accountant, who will, in turn, send you a check for the amount of interest you paid. However, keep in mind that anything over $600 is considered a taxable event, like a big purchase, and will impact your tax return. You can also get a free copy of your 1098 from the IRS.
The mortgage interest deduction calculators can help you figure out how much you can deduct interest on a given loan. Furthermore, this is a great way to increase your chances of completing your taxes without paying extra taxes. The best part is that FlyFin can help you with this task even if you are not yet close to completing your taxes. Now that you have your pay statement, you must enter the mortgage amount and deduct the interest according to the IRS regulations.