One of the perks of a mortgage is the “mortgage interest deduction.” Read on to learn what a mortgage deduction is, how much you can reduce from your taxable income, and how you can take advantage of this tax incentive.
About Mortgage Interest Deduction
The mortgage interest deduction is part of your itemized tax deductions, and it subtracts any interest you’ve paid on loans used to build, purchase or renovate a property. This means that you can subtract a portion of the mortgage interest for primary and secondary homes every year when you do your taxes. This, in turn, reduces the amount you owe Uncle Sam.
To be clear, this perk does not include payments you’ve made to your homeowner’s and private mortgage insurance (PMI). Here’s a list of other home expenses that aren’t tax-deductible:
Deposits or down payments
Extra payments made to the principal
Interest accrued on a reverse mortgage
Mortgage Interest Deduction Limits
The limit has decreased since the Tax Cuts and Jobs Act took effect. This reduction means that single or married individuals filing jointly can deduct only up to $750,000 of interest.
Married couples who file separately have a limit of $375,000 each. But there are exceptions to these new regulations. For example:
Grandfathered Debt: If you got your mortgage before October 13, 1987, you could deduct all of your interest without limit.
Home Acquisition Debt: If you got a mortgage to purchase a home between October 13, 1987 – December 16, 2017, you can deduct up to $1 million –or $500,000 if married and file separately.
Home Equity Debt: For a second mortgage taken out October 13, 1987 – December 16, 2017, for a reason other than building or renovating your home (like to consolidate debt, for example), then you can deduct interest up to $100,000 –or $50,000 if married and filing separately.
Deductions on prepaid interest points are a different story. For example, you may be able to deduct more in the year you bought the points but less in subsequent years.
How To Get A Mortgage Interest Deduction
Your lender will send you Form 1098 at the beginning of the year stating how much you paid in interest and points in the previous year. It’s an official document that proves you’re entitled to receive a mortgage interest deduction. Note that you’ll only receive 1098 if you paid a minimum of $600 in interest during the tax year.
Next, you’ll also itemize your deductions and record them on Schedule A, Form 1040, where you also list your deductions for charitable donations and medical expenses.
Certain circumstances can make declaring a deduction more complicated, so this is when you’ll want the assistance of a financial advisor or tax professional, ensuring that you are getting the max deduction allowed.
When it comes to the benefits of owning property, the list goes on and on. And tax deductions are just one of them. Are you a homeowner? If not, don’t you think it’s time you reap the benefits of owning a home?