How Much Mortgage Interest Can You Deduct?

There aren’t many exciting things about taxes, especially taxes on a mortgage, due to the financial risk this type of investment holds. One of the few enticing parts about a mortgage is lowering the tax amount owed, thanks to a term known as a mortgage interest deduction.

Since hardly any homeowner takes advantage of this tax incentive, there is probably one thing you are eager to learn right now: how much mortgage interest can you deduct?

Single filers and married couples filing together can deduct up to $750,000 in mortgage interest. However, married couples can only deduct up to $375,000 apiece if they file separately.

Since The Tax Cuts and Jobs Act (TCJA) was signed back in 2017, the mortgage interest deduction limit went from $1 million to $750,000.

I will be honest with you. The details surrounding this sophisticated topic may be too much to take in if you haven’t done thorough research.

Although the content is complicated, I crafted an article that will provide you with sufficient information on utilizing the tax incentive to its fullest and which factors to consider when filing.

By the end, you will have learned everything you need to claim the tax deduction!

How Much Mortgage Interest Can You Deduct?

As you already learned, the mortgage interest deduction enables you to reduce the amount of mortgage interest you paid throughout the year from your taxable income. So, if you have a mortgage, keep meticulous records since the interest you pay on your loan can help you save money on your taxes.

Before continuing with the main exposition, I need to clarify a few instances regarding the mortgage interest deduction limit. 

If the mortgage has been taken out before October 13, 1987, it is a grandfathered debt and isn’t limited, so all the interest you pay is deductible. If you have purchased the property after October 13, 1987, and before December 16, 2017, you can take advantage of the $1 million limit. Last but not least, if you have sold your home before April 1, 2018, it still qualifies for the $1 million limit. 

The only condition for the previous instance is that the binding contract should be entered before December 15, 2017, is closed before January 1, 2018, and the home is purchased before April 1, 2018.

The home loan types eligible for a mortgage interest deduction are mortgage (obviously), line of credit, second mortgage, and a home equity loan. Surprising or not, refinancing also qualifies. 

To claim the homeowner’s tax incentive, you need to fill out particular forms, which may be confusing if you have no previous experience. Another meaningful part of the process is choosing between a standard and an itemized deduction. 

Let’s start with the difference between these two deduction types. 

If you choose a standard procedure, you won’t need to fill out additional forms, as the sum you receive is flat. The deduction for 2021 goes like this: 

  • $12,400 for single filing status 
  • $24,800 for married, filing together
  • $12,400 for married, filing separately independently
  • $18,650 for the head of the household  

Choosing an itemized deduction allows you to select from different deduction types, such as mortgage and student loan interest, medical expenses, and others. However, you need to fill out additional forms to state all the selected deductions and the necessary documentation. 

If you wonder which one is most suitable based on your needs, you need to plug in the numbers and see which one saves you more money. Keep in mind that you may have to pay extra if someone else itemizes your taxes. Also, you can’t take advantage of both deduction types.

What Documentation Do I Need to Fill Out to Claim Mortgage Interest Deduction?

You need to fill out a 1098 Form you can get from your mortgage lender or mortgage servicer. This document states the paid amount in mortgage interest and points throughout the past year. It verifies your mortgage interest deduction.

You receive a 1098 Form provided you have paid more than $600 in mortgage interest. Even if it is less than that, you can deduct it.

You must know the correct tax form for you. Provided you don’t rent OR use a part of your house for business purposes, Schedule A is for you – an itemized tax form. This form allows you to select other deductions, including medical, dental expenses, paid taxes, and charity donations. The mortgage interest deduction part is on line 8 of the form. You can find this information on your 1098 in that section.

What Qualifies as Mortgage Interest, and What Is Not Deductible?

The interest on the mortgage for your primary residence, the interest on the mortgage for a second home, the paid mortgage points, the late payment charges on a mortgage payment, the prepayment penalties, and the mortgage insurance premiums all qualify as mortgage interest. 

Homeowner’s insurance, closing costs, including title insurance, moving expenses (unless you are an active-duty military member), deposits, down payments, or forfeited earnest money are all not deductible. Interest accrued on a reverse mortgage and payments made before the deal closing also belong to this category.

The mortgage interest is only deductible when the home you purchased with the loan is used as collateral. 

Conclusion

It turns out that explaining taxes regarding a mortgage can be a compelling topic. Well, when the tax deduction is the main point of discussion anyway. 

How much mortgage interest can you deduct? Although the limit reaches a substantial amount of $750,000, you are unlikely to get that amount deducted from your tax bill. Still, a couple of thousand is no joke and can be a tiny but beneficial boost to your budget. A welcome financial relief, if you will. 

Once you choose the appropriate deduction type based on your unique circumstances, fill out the correct forms, and get everything prepared to be submitted, you are ready to claim your tax deduction. 

Don’t forget to carefully look into your situation and do your research to make the most out of the homeowner’s tax incentive.