The mortgage interest deduction allows you to write off some of the interest you pay on your home loan. It’s a tax incentive for homeowners and can reduce the amount of income tax you pay every year.
Let’s say you paid $26,000 in mortgage interest in a given year, and your income was $120,000. Instead of paying tax on the full amount of your annual income, you’d pay taxes on $94,000.
You can find the specific amount you paid on Form 1098, which your mortgage lender should send out around the end of January each year.
How much interest can I write off?
The rules for how much you can deduct have changed over the years. Currently, you can deduct interest paid on up to $750,000 of your mortgage debt for your primary or second home. If you are married and filing separately, the limit is $375,000.
If you went into contract on your home before December 15, 2017 with a closing date before January 1, 2018—and if you completed the purchase anytime before April 1, 2018—you can deduct interest on a mortgage up to $1,000,000 ($500,000 for married filing separately).
Check out the IRS website for more details on deduction rules.
What qualifies for a mortgage interest deduction?
In addition to your primary residence, you can also write off the mortgage interest on a rental property, but you must use the property yourself for 14 days of the year or 10% of the time it’s rented, whichever is longer. If you don’t use the home at all, the interest you pay on a loan against it is fair game for a deduction.
Late fees incurred from late mortgage payments as well as penalties for paying off your mortgage early can also usually be deducted.
You can also deduct interest payments on a home equity line of credit (HELOC), but only if the money was borrowed to substantially improve your home—not if it was used for another purpose like tuition or to buy a car.
You can also deduct if you’ve bought points, which are a form of prepaid interest on your loan. Deducting points on your tax return has its own set of rules, so be sure to research them thoroughly or discuss with a tax professional.
How do I deduct mortgage interest?
In order to take advantage of the mortgage interest tax deduction, you will need to itemize your tax return rather than take the standard deduction. In some cases the standard deduction may turn out to be a higher amount, so be sure to consider each option. For 2024, the standard deduction is $14,600 for single filers and $29,200 for married taxpayers filing jointly.
Mortgage interest deductions can be a bit complicated to navigate and can take extra time since you’ll need to use Schedule A to itemize your tax return rather than taking the standard deduction. But it could end up saving you significant money. Be sure to compare your itemized deductions to your standard deduction to make sure to get the best outcome.
Sources: Bankrate, IRS, Nerdwallet
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