In all likelihood, your mortgage is the largest loan you’ll take out in your lifetime. Most Americans spend decades paying off their mortgage — and that means racking up a ton of interest. The good news is there s a tax deduction that can make your life a little easier. The mortgage interest deduction reduces the financial burden of mortgage interest, making it easier to become a homeowner.
But what is the mortgage interest deduction? How much is it worth? Who qualifies? And how can you claim it? Read on to learn everything you need to know about the mortgage interest deduction.
What is the mortgage interest deduction?
The mortgage interest deduction is a tax deduction that lets you reduce your taxable income by the amount of interest you paid on your mortgage during the tax year. But before we dive any deeper, we need to put something out in the open. You can only claim the mortgage interest deduction if you itemize your deductions. The Tax Cuts and Jobs Act of 2017 nearly doubled the standard deductions, which made it unnecessary for most taxpayers to itemize. In other words, most Americans are better off claiming their standard deduction than itemizing their deductions to claim the mortgage interest deduction.
How much is the mortgage interest deduction worth?
The value of the mortgage interest deduction varies depending on your filing status and your tax bracket. The table below provides some scenarios to give you an idea of how much you can save with the mortgage interest deduction. These scenarios use the median value of a home in 2020, around $315,000, and assume you paid around $12,000 in interest every year (APR of roughly 4%). We then look at the value for families with a 24% and a 35% tax bracket.
|Status||Standard Deduction||Value of Standard Deduction (24% tax bracket)||Mortgage deduction ($12K @24% tax bracket)||Value of Standard Deduction (36% tax bracket)||Mortgage deduction ($12K @36% tax bracket)|
|Head of Household||$18,350||$4,404||$2,880||$6,423||$4,200|
As you can see, the standard deduction offers more value than the mortgage deduction in both scenarios.
However, if you have other deductions or a large mortgage, itemizing could save you money. However, new regulations lowered the maximum mortgage amount eligible for an interest deduction. The maximum amount you can deduct varies depending on your filing status.
For single or married filing jointly: $75OK
If you bought your home before December 15, 2017, you can deduct the interest you paid on the first $1 million of mortgage debt. If you bought your home after December 15, 2017, you can deduct the interest you paid on the first $750,000 of your mortgage.
For married filing separately: $375K
If you bought your home before December 15, 2017, you can deduct the interest you paid on the first $500,000 of mortgage debt. If you bought your home after December 15, 2017, you can deduct the interest you paid on the first $375,000 of your mortgage.
What counts as mortgage interest?
To qualify for the mortgage interest deduction, the mortgage in question must be for your primary residence or secondary home. If you rent the property out, you must have lived on-site for either 14 days or 10% of the number of days you rented it out (whichever’s larger).
Your residence doesn’t necessarily have to be a house to qualify. Non-traditional residences also fit the bill, including:
- Mobile homes.
As long as the property in question features sleeping, cooking, and toilet facilities, it qualifies. And since mortgage points are a form of prepaid interest, any points you paid on your mortgage also qualify for this deduction.
Also, the mortgage needn’t be for a lump sum. Interest paid on home equity lines of credit and home equity loans also qualify.
What doesn’t count as mortgage interest?
Interest spent on any property lacking sleeping, cooking, and toilet facilities is not eligible for this deduction. In other words, even if you sleep in your van, it won’t qualify. Also not deductible are:
- Mortgage insurance premiums, homeowners insurance, or title insurance.
- Extra principal payments.
- Settlement costs (in most cases).
- Deposits, down payments, or earnest money that you forfeited.
- Interest from a reverse mortgage.
For more information, refer to IRS Publication 936.
Do you qualify for the mortgage interest deduction?
Are you the primary borrower on your mortgage? Are you legally obligated to pay the debt, and are you the one who actually makes the payments? If so, you qualify for this deduction!
But suppose you’re married and co-signed the loan with your spouse? In this case, you’re both primary borrowers, making you eligible for the deduction. However, if you’re filing separately, the limit on the deduction drops to $500,000 (if you bought the house before December 15, 2017) or $375,000 (if you bought it after).
If, however, you make payments on your child’s mortgage to help them out but didn’t co-sign the loan, you are not eligible for this deduction.
How do you claim the mortgage interest deduction?
As mentioned above, you can only claim this deduction if you itemize your deductions. Before you decide to do so, remember to do the math and make sure that your deductions will add up to a larger amount than the standard deduction. Click here to find out which standard deduction is available to you.
Here are the standard deductions by filing status for 2020.
|Married Filing Jointly & Surviving Spouses||$24,800|
|Married Filing Separately||$12,400|
|Head of Household||$18,650|
|Blind or +65||Add $1,300|
To claim the mortgage interest deduction, simply fill out IRS Form 1098. Then, report your home mortgage interest on Line 8 of Schedule A in IRS Form 1040.
Alternatively, if you’re deducting the mortgage interest you paid on a rental property, you’ll report that on Schedule E.
Has the mortgage interest you’ve accumulated over the past tax year convinced you to itemize your deductions? Itemizing your deductions can feel intimidating — it takes a lot of know-how to hunt down all the tax breaks available to you. If you’re feeling daunted, tax preparation software can streamline the process, helping you to make the most of your tax season. To browse tax preparation solutions side-by-side, click here.
Andrew is the Content Director for SuperMoney, a Certified Financial Planner®, and a Certified Personal Finance Counselor. He loves to geek out on financial data and translate it into actionable insights everyone can understand. His work is often cited by major publications and institutions, such as Forbes, U.S. News, Fox Business, SFGate, Realtor, Deloitte, and Business Insider.