If you’re looking to save some money when you file your income taxes this year, you might consider how your property can benefit you. There are several deductions homeowners can use to their advantage, one of which is the mortgage interest deduction.
Use the links below to navigate throughout the article, or read end to end for a more holistic overview of the mortgage interest deduction:
What Is A Mortgage Interest Deduction?
A mortgage interest deduction is a federal tax deduction that subtracts interest paid on a loan that was used to buy, build, or renovate a residential property from a taxpayer’s taxable income. When your taxable income decreases, so does the amount of money you can be taxed on when you file your annual income taxes.
When filing your taxes, you have the option to claim the standard deduction, which subtracts a predetermined amount from qualifying taxpayer’s taxable income; or you can claim several itemized deductions. Each itemized deduction corresponds to a value which is then subtracted from the taxable income of eligible filers. The mortgage interest deduction is one of the most common itemized deductions claimed by U.S. taxpayers.
What Is The Limit On The Mortgage Interest Deduction?
When determining whether you should take the standard deduction or itemize your deductions, it’s a good idea to consider the value of the itemized deductions that you qualify for. For 2019 filers, the limit you can claim is $750,000 for single or married filing jointly or $375,000 each for married filing separately.
Following the Tax Cuts and Jobs Act of 2017, there have been some changes to limits on the mortgage interest rate deduction. Before 2018, taxpayers could claim up to $1 million using the mortgage interest deduction. Since then, the Tax Cuts and Jobs Act lowered the limit to $750,000 for filers who are single or married filing jointly. As for filers who are married and filing separately, they can claim up to $375,000 each.
However, taxpayers should take note of the following exceptions to the new rules:
- Grandfathered Debt: Taxpayers who took out their mortgage prior to October 13th, 1987, can deduct all interest paid.
- Home Acquisition Debt: If you took out a mortgage after October 13th, 1987, but before December 16th, 2017, you can still deduct up to $1 million ($500,000 if married filing separately).
- Home Equity Debt: If you got a second mortgage after October 13th, 1987, but before December 16th, 2017, for any reason besides building or renovating your home, you can deduct mortgage interest up to $100,000 ($50,000 if married filing separately).
If you bought discount points when you took out your mortgage, you may be able to deduct a portion of these prepaid points as well. Use the following equation to figure out how much you can deduct in interest points each year:
(Prepaid points ÷ Full term of loan in months) x Number of mortgage payments made each year
Am I Eligible For The Mortgage Interest Deduction?
Claiming the mortgage interest deduction can be a great way to save money on your annual tax bill, but in order to qualify, you must meet the IRS’ criteria.
To claim a mortgage interest deduction, the following requirements must be met:
- The property is a house, apartment, co-op, mobile home, trailer, or houseboat
- The home must be used as collateral for the loan
- The property must have residential amenities such as sleeping, cooking, and toilet facilities
Note: You can also claim the mortgage interest deduction on a loan that was used to refinance your home.
Additionally, you must itemize your deductions rather than take the standard deduction if you want to claim it on your annual tax return. Once you’ve calculated all of your itemized deductions, check to see if the value is greater than the standard deduction.
The standard deductions for 2019 are:
- Single: $12,200
- Married filing jointly: $24,400
- Married filing separately: $12,200
- Head of household: $18,350
The standard deductions for the 2020 tax year are:
- Single: $12,400
- Married filing jointly: $24,800
- Married filing separately: $12,400
- Head of household: $18,650
To save the most money on your annual tax return, choose the deduction method with the most value, either itemized or standard.
How To Claim The Mortgage Interest Deduction
If you paid more than $600 in interest during a given tax year, your mortgage lender should issue you Form 1098-Mortgage Interest Statement. This form details the interest and mortgage points you paid on your mortgage throughout the tax year, acting as proof that you’re eligible to claim the mortgage interest deduction on your annual return.
To claim the deduction, you will need to itemize your deductions and report them on Form 1040, Schedule A when you file your taxes. Here, you can also claim any other deduction that you qualify for, such as charitable donations or medical expenses.
In addition to Forms 1040 and 1098, you may need to provide additional information via IRS form depending on the type of property you’re claiming the deduction for or if you’re renting out part of the residence.
- The mortgage interest deduction is an itemized deduction that can be used to offset interest that you paid on your mortgage loan during a given tax year.
- The limits for the mortgage interest deduction in 2019 are $750,000 for filers who are single or married filing jointly and $375,000 each for filers who are married and filing separately.
To claim the mortgage interest deduction, you must itemize your deductions and claim them on Form 1040 Schedule A.