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The average mortgage debt was just over $220,000 at the end of 2021, according to Experian data. At a mortgage interest rate of 5.25%, that translates to about $10,500 in interest paid per year. Mortgage interest is likely to be one of the largest regular expenses you have. Under certain circumstances, it can also be one of the largest deductions you can take on your federal tax return.
The mortgage interest deduction lets you deduct interest paid on your mortgage from your taxable income, but it's not the best choice for every taxpayer. Read on to learn more about what the mortgage interest deduction includes, how it works and how to decide whether using it is the right strategy for you.
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What Is the Mortgage Interest Deduction?
The mortgage interest deduction allows you to deduct a limited amount of mortgage interest from your taxable income, lowering the amount of tax you owe. The deduction is only available if you choose to itemize your deductions instead of claiming the standard deduction. It only applies to interest on secured debt taken out to buy, build or substantially improve your first or second home.
How a Mortgage Interest Deduction Works
The mortgage interest deduction applies to different types of mortgage interest, including interest charged monthly as part of your regular mortgage payment and points paid when you finance or refinance your home. However, basic rules and limitations apply.
- The loan must be secured by your home. For interest to qualify as deductible mortgage interest, the loan must use your home as collateral. For example, a personal loan you've used to fix up your house doesn't qualify as mortgage interest.
- The home must be qualified. A qualified home is your main home or second home. It can be a house, condominium, cooperative, mobile home, house trailer, boat or other property that has sleeping, cooking and toilet facilities. It cannot be a rental or investment property.
- The mortgage must be used to buy, build or substantially improve your home. This includes money you receive from home equity loans, home equity lines of credit (HELOCs) or credit card loans secured by your property, as well as any additional cash you've taken out in a refinance. If the money is used to pay down credit card debt or finance your kids' college education, it's not deductible.
The Tax Cuts and Jobs Act (TCJA) of 2017 reduced the amount of deductible mortgage interest taxpayers can claim. For mortgages taken out after December 15, 2017, the mortgage interest deduction is limited to mortgages of $750,000 or less (or $375,000 if you're married filing separately), down from $1 million (or $500,000 for those married filing separately) prior to the TCJA. If your mortgage is larger than these limits, you can only deduct the portion of your interest that applies to a $750,000 loan balance, or a loan balance of $375,000 if you're married filing separately.
There are a few exceptions:
- If you took out your mortgage on or before October 13, 1987, your mortgage interest is fully deductible without limits.
- If your mortgage originated between October 13, 1987, and December 16, 2017, your deduction is limited to the interest on $1 million ($500,000 if married filing separately). The same limit applies if your home was purchased before April 1, 2018, with a binding contract entered before December 15, 2017, and closing before January 1, 2018.
What Qualifies as Deductible Mortgage Interest?
Interest on qualifying homes and mortgages is deductible. But, since mortgage interest can take more than one form, here's a quick rundown on what your deductible amount might include:
- The interest portion of your monthly mortgage payments: The portion of your payment that goes toward paying down principal is not deductible.
- Interest paid on a qualifying home equity loan or line of credit: If the money is being used to buy, build or substantially improve your home, it's deductible.
- Prepaid points on a home loan or refinancing: In narrow circumstances, you may be able to deduct points in full during the year you finance or refinance. More often, you can deduct points in equal installments over the life of the loan.
You may also be able to deduct late payment fees and prepayment penalties on a qualifying mortgage.
What Doesn't Qualify as Deductible?
Other than late payment and prepayment fees, noninterest expenses generally can't be included in the mortgage interest deduction. You can't deduct homeowners insurance premiums, for example, or the cost of home repairs as part of your mortgage interest deduction. Additionally, the following items aren't deductible:
- Mortgage insurance premiums
- Mortgage interest on a third, fourth, fifth (and so on) home
- Interest on unsecured debt, such as personal loans or credit cards
- Interest on debt that is not used to buy, build or improve your home
- Interest accrued on a reverse mortgage
The mortgage interest deduction has quite a bit of fine print attached to it. You may want to check IRS Publication 936 for details on specific situations that affect your mortgage interest deduction, including:
- Using a home office as a business deduction
- Renting out your home or a room in your home
- Deducting points on a new loan in full
- Limits on deductions after refinancing when your original loan was taken out before December 16, 2017. This may only be significant if your mortgage amount is $750,000 or more.
How to Claim the Mortgage Interest Deduction
1. Choose Standard or Itemized Deductions
Start with a quick assessment of your deductions for the year. Add the mortgage interest you paid for the year to any charitable deductions, student loan interest paid, qualifying medical or dental expenses and other deductions you have. Compare your itemized deductions to the standard deduction you're allowed to take. For the 2022 tax year, standard deductions are:
- $12,950 for single filers
- $25,900 for married, filing jointly
- $12,950 for married, filing separately
- $19,400 for heads of households
Choose whichever option gives you the larger deduction. If it's the standard deduction, you can skip the next steps and file without itemizing.
2. Get Form 1098 and Other Documents You'll Need
If you paid at least $600 in mortgage interest for the year, your lender will send you Form 1098, which will show your deductible interest. The lender will also send a copy of your 1098 to the IRS, so it's a good idea to make sure the numbers you report on your tax return match the numbers on your 1098. If the interest reported on your 1098 is wrong, contact your lender and ask them to issue a corrected form.
If you purchased your home or refinanced last year, you may also want to grab the closing statement from your home loan or refinance to see how much you paid (if anything) in points.
3. Itemize Your Deductions on Schedule A
Use Schedule A: Itemized Deductions to calculate your total deductions, including your mortgage interest deduction. You'll enter your total itemized deduction on line 12 of Form 1040.
4. File Your Taxes and Save Your Documentation
Keep your tax return and all related documents, including Form 1098, on file for at least three years, in case the IRS has any questions about your return.
Mortgage Interest Deduction Examples
Seeing how the mortgage interest deduction plays out in real life might be helpful if you're trying to decide whether to claim it or use the standard deduction instead. Here are a few examples to clarify how the mortgage interest deduction works.
When Itemizing Pays Off
Aaron is a single taxpayer who purchased his home with a $500,000 mortgage. He paid $19,100 in mortgage interest in 2022, as shown on his 1098 form. Aaron's interest payments are greater than the standard deduction of $12,950, so he chooses to itemize and claim the mortgage interest deduction on his tax return. Because Aaron is in the 32% tax bracket, the additional $6,150 in deductions saves him about $1,968 in taxes.
When the Standard Deduction Is the Better Choice
Marie and Ken have a $320,000 mortgage on their primary home and a $170,000 mortgage on a vacation home. The mortgage interest on their two homes equaled $19,121 in 2022. Even with charitable deductions of $3,000, their itemized deductions do not exceed the standard deduction for married couples filing jointly, $25,900. Marie and Ken choose the standard deduction, which gives them a larger tax incentive and saves them the trouble of itemizing.
The Bottom Line
The mortgage interest deduction can make affording a home easier by saving you money on your income taxes. Although the deduction requires you to itemize on your tax return, the tax savings can be worthwhile if your deductible expenses for the year are high.
On the other hand, itemizing deductions on your tax return can require a bit more calculation, paperwork and familiarity with the tax code. If you think you'd like to itemize but are unsure which expenses are deductible, you may want to consider working with a tax advisor, who can help you navigate the details and choose the options that work best for you.
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