April 01, 2022 –Hispanic Solutions Group
Buying a home has never been more expensive, experts say, but if you can find one you can afford, you may be able to take advantage of the mortgage interest deduction to lower your tax bill.
However, the IRS rules regarding the mortgage interest deduction can be very complicated. As you look ahead to tax season, here’s a guide to help you understand what interest qualifies for the deduction and how you can benefit if you’re eligible.
What is the mortgage interest deduction?
If you have a mortgage loan, the mortgage interest deduction may allow you to reduce your taxable income by the amount of interest paid on the loan during the year, along with certain other expenses such as mortgage insurance premiums and points The deduction applies only to interest on your mortgage, not the principal, and to claim it, you must itemize your deductions.
The mortgage interest deduction has been around for more than 100 years, but it has changed over time. Different administrations have amended the rules for this benefit, and the tax reform of former President Donald Trump impacted who can benefit.
Mortgage interest deduction limit
If you bought your home before December 16, 2017, you can deduct the mortgage interest paid on your first $1 million in mortgage debt ($500,000 if married filing separately).
For mortgages taken out since that date, you can only deduct interest on the first $750,000 ($375,000 if married filing separately). Keep in mind that if you had a contract before December 15, 2017 and the mortgage was closed before April 1, 2018, your mortgage is considered to be prior to December 16, 2017.
Taking the mortgage interest deduction for your 2021 tax return
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 Schedule A with Form 1040 or an equivalent form.
Because of this, you’ll need to decide whether it’s better to deduct your mortgage interest by itemizing or taking the standard deduction. The standard deduction for tax year 2021 is $12,550 for single taxpayers and $25,100 for married taxpayers filing jointly. For tax year 2022, those amounts increase to $12,950 for single filers and $25,900 for married joint filers.
If you are unsure of the best route to take, consult a tax professional to help you understand the best course of action for your financial situation.
What qualifies as mortgage interest?
The general IRS definition of “mortgage interest” is the interest that accrues on any loan secured by your main home or second home. Other costs and fees that may also be included in the mortgage interest deduction. Here is a summary:
Any interest in your home: The property must include sleeping, cooking, and eating facilities and may be a home, condominium, cooperative, mobile home, boat, or recreational vehicle.
Interest on a second home that you don’t rent: If you rent the property for a certain period of the year, you’ll need to meet certain guidelines (specifically, use it for your own use for more than 14 days or more than 10 percent of the time it’s rented, which whichever is longer) to deduct interest.
Late Payment Fees – If you are late on a payment, you may be able to deduct the additional fee you are charged.
Prepayment Penalties – If you are charged a penalty for paying off your mortgage early, you can deduct this amount.
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 pay. update your property.
What is not deductible?
Interest on a mortgage for a third or fourth home
Any interest on a reverse mortgage.
Closing costs or money for a down payment
Additional payments made towards the principal, among others.
Special considerations for the mortgage interest deduction
When you review the IRS guide to the mortgage interest deduction, you’ll notice a lot of language detailing exceptions in certain situations.
Below is a partial list of those special considerations. If you have a unique circumstance, review the most current IRS Publication 936 or seek guidance from a tax professional.
Home Office Complications – If you use a portion of your property for a home office, you will need to calculate the specific square footage used for living versus working. The living space is the only part that qualifies for a mortgage interest deduction.
Home Under Construction: If you are building a home, you have a qualifying 24-month period under the mortgage interest deduction guidelines.
Home sales: If you sold your home last year, you can still deduct interest accrued on the loan up to, but not including, the date of sale.
How to claim the mortgage interest deduction
Step 1:Watch for communications from your lender or servicer to
beginning of the year 2022. You do not need to keep track of how much interest you are
paying; your lender or servicer takes care of that and will send you the Form
1098. This should arrive in late January or sometime in early February,
Step 2:do the math. You will need to determine if when you itemize your deductions (charges
for mortgage interest and any other eligible deductions) you’ll get more than the standard deduction.
Step 3:Give your Form 1098 to your tax professional or complete Schedule A on Form 1040 on your own. All declared mortgage interest will be entered on line 8a, undeclared interest will go on line 8b, and mortgage insurance premiums will go on line 8d.
Benefits of the mortgage interest deduction
The key benefit of taking the mortgage interest deduction is that it can lower the total tax you pay. Let’s say you paid $10,000 in mortgage interest and are in the 32% tax bracket. It will reduce your tax bill by $3,200 after subtracting the $10,000 deduction from your income.
“Taxpayers making less than $100,000 actually only receive 11 percent of the benefits of this deduction,” Latham says, citing a 2019 report from the Tax Foundation. “By contrast, taxpayers who earn $200,000 or more a year get a larger benefit: 60% of the total savings from the mortgage interest deduction.”
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