A home mortgage interest deduction is an itemized deduction that allows homeowners to deduct any interest on loans that are used to build, improve, or purchase their primary residence, and sometimes, second homes. Taxpayers are required to itemize their deductible mortgage interest on Form 1040 to claim mortgage interest. By itemizing deductions on Schedule A of Form 1040, the taxpayer foregoes the standard deductions for their filing status.
Mortgage interest deductions act as an incentive to taxpayers with homes since it allows them to deduct interests on loans related to purchasing, building, or improving their homes from their annual taxable income. The interest helps reduce the federal tax return for the year. States that assess an income tax also allow taxpayers to claim the mortgage deduction on state tax returns, regardless of whether the deductions were already itemized on their annual federal returns.
A home mortgage interest deduction is a tax deduction that helps homeowners reduce their federal tax returns by claiming interest paid on home mortgages.
The Internal Revenue Service allows interest deductions on mortgages taken for primary residences and/or second residences.
Homeowners are required to report their home mortgage loan interest on Schedule A of Form 1040.
How It Works
When making mortgage interest deductions, homeowners should receive a mortgage interest statement, i.e., Form 1098, from their mortgage lenders at the start of the tax year. The form shows the interest and principal payments paid to the mortgage lender during the previous tax year. The Internal Revenue Service (IRS) only allows taxpayers to deduct the interest amount and not the total payments made to the mortgage lender.
Taxpayers should ensure that the itemized deductions recorded on Schedule A of Form 1040 match the amounts indicated on Form 1098. When submitting income tax returns, taxpayers are not required to attach Form 1098 since mortgage lenders are required to send a copy of the form to the IRS.
Before 2017, homeowners were allowed to deduct mortgage interests on loans of up to $1 million for the primary residence and/or a second residence. However, after the Tax Cuts and Jobs Act of 2017 took effect, the new law lowered the mortgage interest deduction limit to $750,000, or $375,000 for a married couple filing separately.
The $750,000 limit is effective for home acquisition debts originated after December 15, 2017, and remains in effect until 2025. For mortgages originated before December 16, 2017, the former limit of $1 million still applies for single filers and $500,000 for a married couple filing separately.
Qualifying for a Home Mortgage Interest Deduction
Homeowners who meet the requirements set by the Internal Revenue Service can deduct the entire interest paid on a home acquisition loan. The amount of deduction allowed depends on various factors such as the amount of the mortgage, date of the mortgage, and how the loan was used. The IRS allows a home mortgage interest deduction with the following exceptions:
Grandfathered debt qualifies for the deduction. Grandfathered debt refers to a mortgage taken before October 13, 1987. All the interests paid for such mortgage are fully deductible and not limited.
Mortgages taken by single filers or married couple filing separately after October 13, 1987, and before December 16, 2017 qualify for a deduction up to $1,000,000 (single filers) or $500,000 each for married couples filing separately. The mortgages must have been used to build, buy, or improve the home to qualify for the deduction.
For mortgages where a homeowner or the spouse took a mortgage after October 13, 1987, as home equity debt (not as home mortgages) totaling up to $100,000 or $50,000 each for couples filing separately, the mortgage interest qualifies for the deduction if the loan does not exceed the fair market value of the home after considering certain adjustments.
Home mortgages taken before April 1, 2018, are eligible up to $1,000,000 limit if the homeowner proves that there was a binding contract before December 15, 2017. The contract should’ve been scheduled to close before January 1, 2018, and the loan used to build or purchase a home before April 1, 2018.
Where Mortgage Interest Deduction May Not Help
The Tax Cuts and Job Act raised the allowed standard deductions, making it unfavorable for taxpayers to itemize deductions. Before the law was implemented, the standard deductions were capped at $6,350 for single filers and $12,700 for a married couple filing jointly. The legislation adjusted the deductions to $12,200 for single filers and $24,400 for a married couple (filing jointly).
Raising the tax deductions made it unnecessary to itemize deductions since it was more advantageous for taxpayers to claim the revised standard deductions than deducting the home mortgage interest. Itemizing deductions is only favorable when the taxpayer takes a high-value mortgage or two mortgages for two residences so that the mortgage interest is higher than the standard deduction.
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