Mortgage interest is one of the most significant deductions available, and it can make a considerable difference in the amount of taxes you owe when it comes to filing time. Here, we’ll look at the tax break deductions available to homeowners, and how they work.
When you take out a mortgage loan to purchase a home, you’re allowed to deduct the interest paid on that loan from your taxable income. The deduction is calculated by taking the total amount paid in interest for the year, and subtracting it from your total taxable income. That means that if you’ve made $50,000 and paid $10,000 in mortgage interest, you can deduct the $10,000 and only report $40,000 as your taxable income.
Mortgage interest deductions are capped at $1 million for married couples filing jointly, and $500,000 for a single taxpayer. This limit applies to the combination of any loans taken out to buy or improve a first or second residence, such as a primary residence, vacation home, or rental property. Additionally, mortgages taken out after October 13, 1987 are subject to the home acquisition debt limit, which further restricts the amount of interest you can deduct on the first $750,000 of the mortgage balance ($375,000 for single taxpayers).
In addition to mortgage interest deductions, homeowners may also be eligible for other deductions related to home ownership. For example, if you’ve made energy-efficient improvements to your home, you may be able to deduct the cost of those improvements from your taxes. Homeowners may also be able to deduct the costs of certain property taxes, state income taxes, and other fees associated with owning a home.
The Internal Revenue Service (IRS) allows homeowners to deduct a portion of their mortgage payment from their taxes each year. This deduction is known as the “mortgage interest deduction” and in 2020 it applies to mortgage payments up to a maximum of $750,000. The amount of your deduction depends on how much you paid in mortgage interest throughout the year, and the amount of interest-deductible mortgage payments you made.
In order to qualify for the mortgage interest deduction, you must be the owner of the home (or part owner); have used the home as your primary residence for at least two of the last five years; and the home must be used for personal reasons, rather than business or investments.
Taxpayers who use the standard deduction instead of itemizing their deductions may be able to take advantage of the Mortgage Interest Credit (MCC). This credit is offered to taxpayers who took out a mortgage or modified their existing mortgage to make their monthly payments more affordable. To qualify, taxpayers must meet certain income and tax-filing requirements, and receive a Form 8396 from their lender or servicer.
In conclusion, homeowners with a mortgage may be able to take advantage of a variety of deductions and credits to reduce their tax burden. Mortgage interest deductions, energy efficiency credits, property tax deductions, and the Mortgage Interest Credit are a few of the deductions and credits that taxpayers may be eligible for. While some of these deductions and credits may not apply to all homeowners, understanding what is available can help them determine their eligibility for these tax benefits.
This article was contributed on Oct 19, 2023
