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One of the more important benefits of homeownership, along with a sense of pride, is the potential tax benefits.
American homeowners may not realize they can lower their taxes through the IRS rule of mortgage interest deduction.
Homeowners can often subtract the interest paid on their home loan from their taxable income, resulting in significant savings at tax time. Millions of taxpayers claim this deduction each year, reducing their overall tax burden.
But how does it work, who qualifies, and how can you maximize your savings?
This guide breaks down things you need to know about the mortgage interest deduction, including eligibility, calculation methods, and how to claim it on your tax return. Consult with your tax advisor regarding deductions that might be available to you.
Apply now with MIDFLORIDA Credit Union.
How the mortgage interest deduction works
The mortgage interest deduction allows homeowners to lower their taxable income by the amount they pay in interest on a mortgage for their primary or secondary home.
However, this deduction is only available to individuals who itemize their deductions on their tax returns instead of taking the standard deduction.
If you don't itemize, you won't be able to take advantage of this deduction.
Mortgage deduction key details:
- The deduction applies to interest paid on mortgages up to $750,000 for loans taken after December 15, 2017 ($375,000 if married filing separately).
- The higher limit of $1 million ($500,000 for married homeowners filing separately) still applies to mortgages originated before this date.
- Interest on home equity loans and HELOCs is deductible only if the funds were used to buy, build, or otherwise improve the home, securing the loan.
- Homeowners must compare their total itemized deductions with the standard deduction to determine whether itemizing provides greater tax savings.
Who qualifies for the mortgage interest deduction?
To successfully claim the mortgage interest deduction, you must meet specific eligibility criteria:
- You must be the borrower: The mortgage must be in your name, and you must be legally responsible for repaying the loan
- A qualified residence must secure the home loan: This includes a primary or secondary home; rental properties do not qualify unless you also use the property as a residence for part of the year.
- The mortgage must be for acquisition debt: The deduction applies only to loans used to buy, build, or improve a home.
How to calculate your mortgage interest deduction
If you qualify, your lender will send Form 1098, which details the total interest paid during the tax year. Here’s how to determine your deduction:
- Check Form 1098, usually provided by your lender in January
- Compare your total itemized deductions (including mortgage interest, property taxes, and medical expenses) with the standard deduction:
- $13,850 for single filers
- $27,700 for married couples filing jointly
- $20,800 for heads of household
- If your mortgage is under the applicable limit ($750,000 or $1 million for older loans), you can deduct all interest paid—only interest on the first $750,000 of debt is deductible if it exceeds the limit
Special cases and considerations for mortgage interest deduction
Certain situations and circumstances require specific attention when calculating and claiming the mortgage interest deduction.
Refinancing and the mortgage interest deduction
If you refinance, you can still deduct interest paid, but the deduction is limited to the remaining balance of your original loan.
If you took cash out during the refinance, the interest on that portion is only deductible if used for home improvements.
Home equity loans and HELOCs
Interest on home equity loans and HELOCs is only deductible if the funds were used for home-related expenses, such as renovations or additions.
Interest on loans used for personal expenses (e.g., tuition, debt consolidation) is not deductible.
Mortgage points deduction
If you paid points (loan origination fees or discount points) to reduce your mortgage rate, you may be able to deduct them.
- Points paid on a home purchase can typically be deducted in full the year they were paid.
- Points from a refinance must be deducted over the life of the loan.
Married couples filing separately
Both spouses must split the mortgage interest deduction if you're married but filing separately.
The deduction limit is reduced to $375,000 per person for loans taken after December 15, 2017, or $500,000 per person for older loans.
How to claim the mortgage interest deduction
To claim the deduction, follow these steps:
- Obtain Form 1098: Your lender will provide this form detailing how much interest you paid during the year.
- Decide if itemizing is beneficial: If your total itemized deductions (including your mortgage interest) exceed the standard deduction, itemizing may save you money.
- Complete Schedule A (Form 1040): Use Schedule A to report your mortgage interest deduction and other itemized deductions.
- File your tax return: Attach Form 1040 and Schedule A when filing. Tax software will guide you through the process of filing electronically.
Common mistakes to avoid
Many homeowners miss out on savings or make errors when claiming the mortgage interest deduction.
Here are some pitfalls to avoid:
- Claiming interest on a mortgage that isn’t in your name: Only the borrower legally responsible for the loan can deduct the interest.
- Forgetting to prorate for a partial year: If you bought your home mid-year, you can only deduct interest for the months you owned it.
- Misreporting home equity loan interest: Only interest on funds used for home improvements is deductible.
- Not comparing itemized vs. standard deductions: If the total amount of your itemized deductions is less than the standard deduction, itemizing may not provide additional tax savings.
Should you itemize or take the standard deduction?
The mortgage interest deduction only benefits homeowners who itemize. If the total amount of your itemized deductions exceeds the standard deduction, itemizing is worth considering.
However, taking the standard deduction may be the better option if your mortgage is small or nearly paid off.
Generally, those with new mortgages, higher interest payments, or other significant deductions (such as property taxes and medical expenses) gain the most from itemizing.
MIDFLORIDA knows homeownership
Using mortgage interest deduction can save you thousands of dollars yearly.
Understanding how it works, keeping accurate records, and determining whether itemizing is the right choice can help maximize your tax savings.
At MIDFLORIDA, we know how difficult it is to save money. That’s why we try to help our clients and Floridians everywhere we can. If you’re considering buying a home or refinancing, contact us.
Start your application with MIDFLORIDA right now, and our team can help you explore mortgage options that fit your needs.
