Mortgage Interest Tax Deduction Guide

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Tax season began at the end of this year to give the IRS more time to prepare its systems after the COVID-19 relief law came into effect in December.

For homeowners, that means even less time to answer the annual question: Does your mortgage entitle you to tax relief or other deduction? It’s not a simple yes or no answer, says Mark Steber, tax director at the Jackson Hewitt Tax Service.

Pro tip

To see if you qualify for the mortgage interest tax deduction or to help you decide if you need to itemize, it’s always a good idea to speak to a tax professional.

In this article

The mortgage interest tax deduction can be of great benefit to some. But, just because you have a mortgage doesn’t make sense to use the deduction. Here are some things you need to know about eligibility and claiming mortgage interest tax deduction:

What is the mortgage interest deduction?

To understand the mortgage interest deduction claimed by some filers, it helps to better understand your mortgage payments, which consist of two parts:

  1. The principal, which is the amount you borrowed
  2. Interest, which is a percentage of that amount that represents the cost of borrowing that money

When we talk about deducting mortgage interest, we are talking about whether homeowners can deduct the total interest they paid for the tax year, thereby reducing the total income that their tax bill is based on.

“That means it can be subtracted from your total taxable income, thereby reducing the amount of federal taxes you owe each year,” says Megan Bellingham, operations manager at digital mortgage lender Better.com. “If you qualify for mortgage tax deductions, it will only make sense to claim them. “

However, your eligibility depends on your loan amount and how you file your taxes.

Should you make a standardized or itemized deduction?

To be able to deduct mortgage interest from your taxes, you will need to itemize your deductions on your tax return. This means that your total mortgage interest and other items, such as private mortgage insurance (PMI), state and local taxes, and charitable donations, should be greater than the standard deduction.

But thanks to the Tax Cuts and Jobs Act of 2017, retail makes less sense to more Americans. This is because the law increased the amount of the standard deduction, increasing the number of people for whom it makes sense.

He also lowered the mortgage threshold allowing for a tax deduction of mortgage interest. For mortgages created before December 16, 2017, you can deduct loan interest up to $ 1 million. For loans created after this date, you can deduct interest on loans up to $ 750,000.

For the 2020 tax year, the standard deduction is:

  • • $ 12,400 one-time deposit
  • • $ 24,800 married, joint deposit
  • • $ 12,400 for married people, to be deposited separately
  • • $ 18,650 for the head of the family

“The standard deduction was about half of what it is now, so it was easier to deduct your mortgage interest,” says Eric Bronnenkant, CPA, CFP and Head of Tax at Betterment, a financial planning agency. . . “The doubling of the standard deduction as part of the 2017 tax reform and the continued limitation of the mortgage interest loan balance has made it more difficult for people to benefit from the mortgage interest they are paying.

So the detail only makes sense if your total mortgage interest, taxes, charitable donations, and other tax-deductible expenses are more than the standard deduction amount you’re entitled to, Steber says.

Since mortgage interest rates were so low this year, people, in general, paid less interest, so it might be better to skip the mortgage interest deduction and take the standard, Steber says. “Fewer taxpayers will detail than before this law,” Steber says.

How to claim the mortgage interest tax deduction

If you work with a tax professional to file your taxes, they can help you determine it based on your personal situation. If you are filing yourself and have determined that it makes sense for you, here is what you will need to do to claim the mortgage interest tax deduction:

  1. Collect Form 1098 from your lender. Usually arriving in January, this form will contain the loan amount and the interest you have paid.
  1. Determine if you can itemize your deductions. If you choose itemized deduction, you can select deductions such as mortgage interest, student loan interest, medical expenses, etc. Add up the total interest on the Form 1098, along with other items such as state and local income tax, mortgage insurance, and charitable donations. If this total exceeds the standard deduction, then you can see a better return with the detailed path.
  1. To detail, complete the Planning a with your tax return. This form is where you list all of your itemized tax deductions.
  1. Keep records for at least seven years. Even if you can’t itemize, keep your Form 1098 and other documents justifying potential deductions for at least seven years in the event of an audit, Steber says.

What is eligible for this deduction in 2020?

Deductible mortgage interest is interest paid on a loan secured on an “eligible home” for a primary or secondary residence..

Your mortgage is the secured loan in this case, which means that in the event of a default, the lender can take possession of your home.

The IRS defines a qualified household as:

  • Principal residence: A residence where you live most of the time.
  • Second home : A second residence. As long as it is not a property that you are renting out. However, there are exceptions.
  • The primary or secondary residence can be a house, a condo, a mobile home, a boat or a trailer.
  • The main or secondary house must have facilities for sleeping, cooking and toilets.
  • The main or secondary residence can be under construction.

Other types of payments also count as mortgage interest, including:

  • Mortgage points you paid. “Points”, sometimes referred to as loan origination fees or loan discounts, are prepaid interest.
  • Interest on a home equity loan Where Home equity line of credit (HELOC), as long as the loan was used to “buy, build or significantly improve” the property. If you used the funds to go on vacation or to pay off credit card debt, the interest is not deductible.
  • Mortgage late payment fees
  • Mortgage prepayment penalties. Sometimes homeowners are penalized for prepaying a mortgage. The penalty can be viewed as a deduction from mortgage interest.
  • When you sell your house, you can deduct the mortgage paid up to the date of sale.
  • Mortgage loan insurance premiums issued by the Department of Veterans Affairs, Federal Housing Administration, or Rural Housing Service, or private mortgage insurance (PMI) is deductible for 2020.
    • For mortgage insurance contracts issued after 2006.

Mortgage interest may not be eligible if your AGI (Adjusted Gross Income) is greater than $ 100,000 (on Form 1040).

What is not deductible in 2020

All mortgage interest is not tax deductible. Here’s what the IRS says isn’t tax deductible:

  • Mortgage debt unsecured by a guarantee.
  • Mortgage interest on properties other than the primary and secondary residence.
  • Home Equity Loans, or HELOC, when you are not using the funds to buy, build, or significantly improve the property.
  • Any interest on loans over $ 750,000 (or $ 1 million on loans taken out before December 16, 2017).
  • Home insurance.
  • Interest accrued on reverse mortgages.


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