Buying a home has never been more expensive, but if you can find one you can afford, there’s some good news after you move in. You might be able to take advantage of the mortgage interest deduction to lower your tax bill.
IRS rules regarding the mortgage interest deduction can be very complex. As you look ahead to tax season, our team at Corken + Company wants to make sure you have a guide to help you understand what interest qualifies for the deduction and how you can benefit.
What is the mortgage interest deduction?
If you have a home loan, the mortgage interest deduction might allow you to reduce your taxable income by the amount of interest paid on the loan during the year, along with some other expenses such as mortgage insurance premiums and points.
The deduction applies only to the interest on your mortgage, not the principal, and to claim it, you need to itemize your deductions.
Mortgage Interest Deduction Limit
If your home was purchased before Dec. 16, 2017, you can deduct the mortgage interest paid on your first $1 million in mortgage debt ($500,000 if you are married filing separately).
For mortgages taken out since that date, you can only deduct the interest on the first $750,000 ($375,000 if you are married filing separately). Note that if you were under contract before Dec. 15, 2017, and the mortgage closed prior to April 1, 2018, your mortgage is considered to have been before Dec. 16, 2017.
Taking the Mortgage Interest Deduction for Your 2021 Tax Filing
While almost all homeowners qualify for the mortgage interest tax deduction, you can only claim it if you itemize your deductions on your federal income tax return by filing a Schedule A with Form 1040 or an equivalent form.
Because of this, you’ll have to decide whether it’s better to deduct the mortgage interest by itemizing or taking the standard deduction. The standard deduction for tax year 2021 is $12,550 for single filers and $25,100 for married taxpayers filing jointly. For tax year 2022, those amounts are rising to $12,950 for single filers and $25,900 for married joint filers.
Let’s say you’re a single homeowner who spent $18,000 in mortgage interest in 2021. It would make sense in this scenario to itemize your deductions, as you’ll reduce your taxable income by a greater amount than you would if you were to take the standard deduction.
What Qualifies as Mortgage Interest?
The IRS general definition of “mortgage interest” is interest that accrues from any loan secured by your primary home or a second home. There are other costs and fees that can be included in the mortgage interest deduction, too.
Here’s a rundown:
- Any interest on your home: The property must include sleeping, cooking and eating facilities and can be a home, condo, co-op, mobile home, boat or recreational vehicle.
- Interest on a second home you don’t rent out: If you do rent out the property for a certain period of the year, you’ll need to meet certain guidelines (specifically, using it for your own use either more than 14 days or more than 10% of the time it’s rented out, whichever is longer) to deduct the interest. Be sure to read up on other tax deductions for a rental property.
- Most mortgage insurance premiums: For tax year 2020, if your adjusted gross income (AGI) is more than $109,000 as a married couple or $54,500 if filing individually, you can’t deduct mortgage insurance costs.
- Late payment fees: If you’re late on a payment, you can likely deduct the extra fee you’re charged.
- Prepayment penalties: If you’re charged a penalty fee for paying off your mortgage early, you can deduct this amount.
- Points: If you paid points to lower your mortgage interest rate, you can deduct a portion of these that applies to the individual filing year.
- Home equity loans and home equity lines of credit used to improve your home: If you took out a home equity line of credit (HELOC) or home equity loan to pay for a home renovation project, you can deduct interest on the amount you used to upgrade your property.
What is not deductible?
- Interest on a mortgage for a third or fourth home
- Any interest on a reverse mortgage
- Homeowners insurance
- Appraisal fees
- Notary fees
- Closing costs or down payment money
- Extra payments made toward the principal
- Home equity loan funds/HELOC funds used for purposes unrelated to your property (for example, if you borrowed against your home to pay for a wedding, these funds are not deductible)
How to Claim the Mortgage Interest Deduction
Step 1: Watch for communications from your lender or servicer in early 2022. You don’t have to keep track of how much interest you’re paying; your lender or servicer takes care of that and will send you Form 1098. This should arrive near the end of January or sometime in early February. It should also include mortgage insurance premiums and any prepaid interest.
Step 2: Do the math. You’ll need to determine if itemizing your deductions will give you a larger sum than the standard deduction.
Step 3: Hand your Form 1098 to your tax professional. Or, complete the Schedule A on Form 1040 on your own. All reported mortgage interest will be entered on line 8a. Any unreported will go on line 8b and mortgage insurance premiums will go on line 8d.
Benefits of the Deduction
The key benefit of taking the mortgage interest deduction is that it can decrease the total tax you pay. Let’s say you paid $10,000 in mortgage interest and are in the 32 percent tax bracket. You’ll lower your tax bill by $3,200 after subtracting the $10,000 deduction from your income.
We hope this information helps you in filing your taxes in 2022! If you’re lucky enough to qualify for a refund, consider some of the ways to invest that money in your financial well-being.
Learn more about interest rates in 2022 at: