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Understanding the Mortgage Interest Deduction for Better Tax Filing: Unlocking the Advantages

Understanding the Mortgage Interest Deduction for Better Tax Filing: Unlocking the Advantages
mortgage interest deduction what you need to know. (Photo: AdobeStock)

The cost of buying a home has never been higher, but if you can find one within your means, there’s some good news once you’ve settled in. You might be able to use the mortgage interest deduction to reduce your tax burden.

Understanding the Mortgage Interest Deduction for Better Tax Filing: Unlocking the Advantages

Artography (Photo: Shutterstock)

But, IRS regulations governing the mortgage interest deduction can be extremely complex. Here is a guide to explain what interest is eligible for the deduction and how, if you are, you may take advantage of it.

The mortgage interest deduction used to be very generous, and many homeowners took advantage of it. Yet now that there are massive loans and high interest rates, taxpayers are the main beneficiaries of the break.

What does the interest on a mortgage mean?

If you have a mortgage, you might be able to reduce your taxable income by subtracting the interest you paid over the course of the year in addition to various supplemental expenses like points and mortgage interest deduction.

The deduction, which is only applicable to the interest paid on your mortgage interest deduction and not the principle, must be itemized in order to be claimed. To obtain a rough idea of the kind of tax savings you can anticipate, utilize Bankrate’s mortgage interest deduction calculator.

Over the course of its more than 100-year existence, the mortgage interest deduction has undergone changes. The guidelines for this benefit have been altered by various administrations.

Together with the introduction of the first income taxes in 1894 and 1913, the mortgage interest deduction also received its beginnings during those years. All interest payments were at the time tax deductible. Homeownership was far less common than it is now.

The Federal Housing Agency was established in the 1930s to insure mortgages, and the post-World War II GI Bill assisted in giving veterans who had served in the war access to low-interest loans, which helped drive up the homeownership rate to 62% by 1960.

Credit card use increased in the 1970s, which allowed people to write off significant sums of interest on their taxes. Congress approved a statute capping the amount of loan principle that could be written off at $1 million in 1986, keeping the mortgage interest deduction in place but terminating the deductibility of most interest.

The deduction has seen some revisions since then. The maximum loan amount, for instance, was decreased by former President Trump to $750,000.


Limit On Mortgage Interest Deductions

You may deduct the interest you paid on your first $1 million in mortgage debt (or $500,000 if you’re married and filing separately) if your home was purchased before December 16, 2017, as long as it was.

You may only write off interest on the first $750,000 ($375,000 if you’re married and filing separately) of mortgages that were taken out after that date. Remember that your mortgage is considered to have been concluded before December 16, 2017 if you were in contract before December 15, 2017, and the mortgage closed before April 1, 2018.


How To Take The Interest On A Mortgage Deduction

The mortgage interest tax deduction is available to practically all homeowners, but you can only take advantage of it if you itemize your deductions on your federal income tax return by submitting a Schedule A with Form 1040 or a similar form.

Due to this, you must choose between itemizing your deductions for mortgage interest and taking the standard deduction. For the tax last year, the standard deduction for a single person is $12,950, while it is $25,900 for a married couple filing jointly.

Hence, it would only make sense to itemize if the sum of the mortgage interest you paid and any other deductions for which you are qualified exceeded those sums.


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Follow These Steps to Claim The Mortgage Interest Deduction.

  1. Early in the year, keep an eye out for correspondence from your lender or servicer. Your lender or servicer will take care of keeping track of your interest payments and give you Form 1098; you don’t need to.
  2. This should arrive before the end of January or somewhere in the first half of February, and it ought to contain details on any additional deductible expenses, such as points or fees paid.
  3. You must decide if itemizing your deductions—including any eligible deductions for mortgage interest costs—will result in a bigger overall deduction than the standard deduction.
  4. Send your Form 1098 to your tax advisor or do the Schedule A on your own Form 1040. Line 8a should be used for all reported mortgage interest, line 8b for unreported interest, and line 8d for mortgage insurance premiums.

What is considered to be mortgage interest qualified?

The IRS defines “mortgage interest” as any interest that accumulates from a loan that is secured by your principal residence or a secondary residence. The deduction for mortgage interest might also apply to other expenses and fees. Here is a summary:

  1. Any inquiries about your house The home, condo, cooperative, mobile home, boat, or recreational vehicle must provide sleeping, cooking, and eating areas.
  2. Late payment fees – If you pay a bill after the due date, you probably qualify for a deduction for the late payment fee.
  3. Prepayment penalties: You can deduct this sum if you were assessed one for paying off your mortgage early.
  4. Points: You can write off a part of points that relate to the individual filing year if you paid them to lower your mortgage interest rate.
  5. House improvement with home equity loans and lines of credit – You can deduct interest on the amount you borrowed for a home improvement project, whether it was a home equity line of credit (HELOC) or a home equity loan.


What Home Loan Expenses Are Not Tax Deductible

  1. Mortgage interest on a third or fourth property
  2. A reverse mortgage’s interest
  3. Payments for mortgage insurance
  4. Habitational insurance
  5. Fees for appraisal
  6. Notary charges
  7. Closing expenses or a down payment
  8. Further contributions made to the principal
  9. HELOC or home equity loan money utilized for non-property-related activities


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Particular factors to consider when claiming the mortgage interest deduction

There is a lot of verbiage detailing exclusions in specific circumstances in the IRS guidance for the mortgage interest deduction. A partial list of these unique factors can be found below. If your situation is special, consult the most recent edition of IRS Publication 936 or consult a tax expert for advice.

  1. Complications related to home offices – If you use a piece of your property as a home office, you’ll need to determine the precise square footage that is being used for living vs working. The only area that can be deducted for mortgage interest is the “living” space.
  2. House under construction – If you’re building a home, the mortgage interest deduction rules provide you a 24-month window in which to claim the deduction.
  3. Sales of homes – If you sold your house last year, you can still deduct interest that was accrued up until the selling date but not after that.
  4. Refinancing with points paid – If you paid again your finance, the mortgage in 2021 and paid points to lower the rate, it’s likely that you won’t be able to fully deduct the cost of those points. As an another way, you might be able to subtract some of those points from the total amount of the new loan.


To Sum Up

Homeowners can reduce their tax liability by using the mortgage interest deduction, however this tax break normally only applies to those who have big loans or loans with high interest rates. Keep track of your interest expenses and contrast them with the standard deduction. This tax deduction can help you save if you pay more in interest compared to the standard deduction.


Read More:

Top Tax Deductions and Tax Credits: Unlock the Full Potential of Your 2023 Tax Return You Can Not Afford to Miss

Tax Season 2023: Update on Home Office Tax Deductions

Choosing Between Tax Deductions and Tax Credits: Optimizing Your Tax Savings

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