See what mortgage you qualify for
If you’re like most homeowners, you’re probably looking for ways to get the most value out of your home. Fortunately, there’s a way to do that come April 18, 2023 (hint: the 2022 tax filing deadline) by using the mortgage interest deduction.
Essentially, you alert the IRS to all the money you paid in interest on your home, and in exchange, you get to use that same amount to lower your tax bill.
Read on to see if you qualify and what the limits are for the mortgage interest deduction.
What Is the Mortgage Interest Deduction?
The mortgage interest deduction is a tax deduction that lowers your taxable income (aka the amount of taxable money you earned in a year) by subtracting the interest you’ve paid on your mortgage, as well as other qualifying expenses we’ll get into later.
But you can only deduct your mortgage interest if you itemize your income tax deduction. To itemize, use Schedule A to list all your allowed expenses.
What Are the Limits and How Much Can You Deduct?
The short answer is that it depends on when you bought your home.
Before the Tax Cuts and Jobs Act of 2017, you could deduct interest on the first $1 million of your mortgage debt. This was good for a lot of homeowners because the interest they paid was usually higher than the standard deduction (we’ll get into that in a minute).
The act changed the equation. It doubled the standard deduction and lowered the amount of mortgage debt you could claim to $750,000. It also added new restrictions that based the mortgage interest deduction on how you used the money.
So, if you bought your home before December 15, 2017, you could still claim the deduction for up to $1 million. After that, you were limited to $750,000, or $375,000 per person for married couples who filed separately.
Standard Deduction vs. Itemized: Does Using the Mortgage Interest Deduction Make Sense for You?
The first question many of us tackle when filing our taxes is whether we’ll take the standard deduction or an itemized deduction.
In other words, you want to figure out if all of your deductible expenses add up to more than the standard deduction.
To start, here are the standard deduction amounts for the 2023 tax year:
- $13,850 (single taxpayers and married couples filing separately)
- $20,800 (heads of households, couples or families with only one income)
- $27,700 (married couples filing jointly)
When to take the standard deduction
Let’s assume you’re single and bought a $300,000 home at 3% interest with a 30-year fixed-rate mortgage.
Your monthly mortgage payment will be $1,264.81. Because your payment is a combination of principal and interest, $514 will go toward the principal and the remaining $750 will go toward interest.
Each month after that, a little bit more of your payment will go from paying your interest to paying your principal. Assuming that you made your first payment in January, after a year, you will have paid $8,914.34 in interest.
If your only deduction is your mortgage interest, you’re better off taking the $13,850 standard deduction. You’ll get more back and you (or your tax preparer) will save time because you’ll be using a simpler form.
When to itemize deductions
That mortgage interest deduction sounds so inviting. Who wouldn’t want to get credit for all the interest they’re paying on their mortgage? But be careful – you may do better with the standard deduction. It’s important to run the numbers and see which option works best for you.
Let’s try a scenario where itemizing deductions makes sense. Let’s say you bought that same $300,000 house with a 30-year fixed-rate mortgage at 6% interest.
After that first year, you will have paid $17,899.78 in interest. That’s more than the standard deduction ($5,349.78 more, to be exact!).
Let’s say that in addition to your mortgage interest, you have other expenses you can deduct, including:
- Charitable deductions (up to 100% of your gross income)
- Property and state income taxes (up to $10,000)
- Self-employed health care insurance premiums
If your allowable expenses and your mortgage interest total up to more than the standard deduction, you’ll want to itemize.
What Qualifies for the Mortgage Interest Deduction?
The cool thing about the mortgage interest deduction is that you can deduct a wide range of home loans and other expenses related to buying your home. You can deduct:
The mortgage for your primary residence
For most of us, this is our only mortgage. But you can deduct the interest for all kinds of homes, including a single-family home, co-op, condo, mobile home, house trailer or houseboat. As long as the home has a place to sleep, something to cook on and a toilet – and you’re paying a mortgage on it – it counts.
The mortgage for a second home or timeshare
If you own a second home or vacation home (or part of a vacation home) you can deduct the mortgage interest.
A word of warning: You can rent out the home for part of the year, but to qualify for the deduction, you must live in the home for at least 14 days or more than 10% of the number of days it’s rented (whichever is longer).
Otherwise, the IRS will consider the home an investment property, and it won’t qualify for the tax deduction.
Also, if you have more than one second/vacation home – yes, that’s a thing – you can only treat one home as the qualified second home during any year. The good news is that you can choose which second/vacation home to claim a deduction on.
If you’re paying more in interest on one home compared to another, you may want to consider selecting the home that offers the highest possible deduction.
A home equity loan or home equity line of credit
There’s one thing to note here. Before the 2017 Tax Cuts and Jobs Act, no matter what you used either of these loans for, you could deduct the interest. Today, you can only take the deduction if you’re using the money to buy, build or improve your primary or second home.
Mortgage discount points
When you get a mortgage, you can opt to buy mortgage discount points. Each point costs about 1% of your home loan and lowers your interest rate by 0.25%.
If you bought a mortgage discount point(s), you can deduct what you paid for the point(s). You would either claim the total amount you paid the year you bought the home (if you paid the points upfront with cash) or deduct that amount over the life of the loan (if you rolled the cost of points into your loan).
If you pay off your mortgage early and your lender charges a prepayment fee, you can deduct it as mortgage interest. (FYI: Not all lenders charge prepayment fees.)
If you’re paying for mortgage insurance and your adjusted gross income is less than $100,000 (this applies whether you’re single or married and filing jointly), it can also count toward the mortgage interest deduction.
This applies to private mortgage insurance (PMI), mortgage insurance premiums (MIPs) on Federal Housing Administration (FHA) loans, funding fees on Department of Veterans Affairs (VA) loans or guarantee fees on U.S. Department of Agriculture (USDA) loans.
What Doesn’t Qualify for the Mortgage Interest Deduction?
Not all home buying expenses qualify for the mortgage interest deduction, including:
- Non-mortgage insurance: Any insurance that doesn’t relate directly to the mortgage, like homeowners insurance and title insurance, can’t be deducted.
- Extra principal payments: Making extra payments toward your mortgage principal can help you pay down your mortgage faster, but you can’t deduct extra payments on the principal.
- Closing costs: If you just became a homeowner, you probably had to pay closing costs, like an origination fee, appraisal fees, title search fees and attorneys fees. As you’ve probably guessed, none of these costs are deductible.
- Seller financing: Wraparound mortgages (where the seller finances the loan) don’t qualify for the deduction.
How Do You Claim the Mortgage Interest Deduction on Your Taxes?
Let’s say you decide to itemize your deductions and take advantage of the mortgage interest tax deduction. First, you’ll need to know how much you paid in mortgage interest over the previous tax year (January – December).
Assuming your mortgage interest was more than $600, your lender or loan servicer should send you a Form 1098 that reports how much you paid in mortgage interest.
The form is usually sent around January or February. If the tax deadline is fast approaching and you still don’t have the form, see if you can download it off your lender’s or servicer’s website or give them a call.
If neither of these options works or you paid less than $600, check your December mortgage statement to see if it shows interest paid year to date. If it does, you can use the statement to fill out the Form 1098 worksheet to help calculate your mortgage interest.
While most tax returns start with Form 1040, if you’re itemizing deductions, you’ll need to fill out a Schedule A as well. You’ll list all of your allowable deductions there, including medical and dental expenses, charitable contributions and property taxes.
Enter your mortgage interest deduction on line 8 of the Schedule A form.
Taking Advantage of the Mortgage Interest Deduction
While the mortgage interest deduction may not save homeowners as much as it once did, under the right circumstances, it might help you lower your tax bill.
Remember, it may not offer a dollar-for-dollar deduction for the interest you’ve paid (if your mortgage is higher than the limits we mentioned earlier), and you’ll likely need other itemized deductions to make it worthwhile. The good news is that the vast majority of people fall into the group that can deduct 100% of mortgage interest – and you likely will too.
The key to taking advantage of the deduction is to know what you can deduct and to have your paperwork ready when you talk to your tax preparer or file your return.
Don’t be afraid to ask questions. When it comes to paying less in taxes, every penny helps.
Internal Revenue Service. “Interest on Home Equity Loans Often Still Deductible Under New Law.” Retrieved June 2022 from https://www.irs.gov/newsroom/interest-on-home-equity-loans-often-still-deductible-under-new-law
Internal Revenue Service. “IRS provides tax inflation adjustments for tax year 2022.” Retrieved January 2023 from https://www.irs.gov/newsroom/irs-provides-tax-inflation-adjustments-for-tax-year-2023
Internal Revenue Service. “Charitable Contribution Deductions.” Retrieved June 2022 from https://www.irs.gov/charities-non-profits/charitable-organizations/charitable-contribution-deductions
Internal Revenue Service. “Publication 936, Home Mortgage Interest Deduction.” Retrieved June 2022 from https://www.irs.gov/publications/p936
Internal Revenue Service. “Topic No. 415 Renting Residential and Vacation Property.” Retrieved June 2022 from https://www.irs.gov/taxtopics/tc415