How Does the Mortgage Tax Deduction Work?

If you currently make a monthly mortgage payment, the first portion of that payment is applied to the interest that has accrued since your last payment. At the end of each calendar year, your mortgage lender will mail you a Form 1098 showing how much mortgage interest you paid for the year. What you might not know is that you might be able to get some of that money back in the form of a tax deduction.

You Must Itemize to Claim the Mortgage Tax Deduction

Before you get too excited about the possibility of getting a larger tax refund, you must be able to ”itemize” your federal income taxes. This isn’t like the student loan interest tax deduction that you can deduct if you itemize or not.

Depending on how you have spent the remainder of your money throughout the year, it might be tougher to qualify for the deduction than you think.

There are two primary factors that determine if you can itemize.

Factor #1: Your Filing Status

Arguably, it’s easier to deduct your mortgage interest if you are single. This is because single filers only need to have $6,300 in qualified deductions to itemize. If your status is “married filing jointly,” you will need to have $12,600 in deductions to itemize. Otherwise, you cannot claim your mortgage interest.

Factor #2: Your Other Deductions

Let’s assume you are still $2,000 short of being able to itemize after calculating your mortgage interest paid. There are a couple other resources to pull from as well.

These might be some other expenses you paid that qualify for itemizing:

• Contributions to charities
• Property taxes or local taxes paid
• Medical and Dental Expenses that exceed 7.5% of your adjusted gross income
• Work-Related Travel expenses and Union Dues

Related: Buying a New Home? You Need to Know What Happens At Closing

You Can Only Deduct the Interest on Two Homes

If you own more than one home, you can only claim the interest paid on two homes. These must be the two homes you live in the most.

That means if you use a second home as a rental property, you must use the home for at least 14 days or 10% of the time it is rented out.

Related: Understanding Private Mortgage Insurance (PMI)?

Most Home Loans Qualify

Your traditional mortgage or second mortgage will qualify for the deduction as the loan is secured with your house as collateral. If you have a home equity loan or line of credit, you should be able to deduct the interest paid as well because the loan is secured with your existing home equity. If the loan doesn’t use your house as collateral, it is considered a personal loan and the interest isn’t tax-deductible.

Essentially, your lender is required to send you a Form 1098 each year you paid qualifying mortgage interest. If you received a form, you can deduct the interest by itemizing.

Use a Mortgage Tax Deduction Calculator to See Your Potential Savings

Finally, using a mortgage tax deduction calculator will allow you to see how much additional money you can save at tax time. You won’t get a 1:1 ratio (1 dollar in interest= 1 less dollar in taxes due), but, it will still lower your tax bill and can help you get a bigger refund.

Is The Mortgage Tax Deduction Worth It?

If you can claim the deduction, it is. But, an even better strategy is to repay your loan as quickly as possible or save up enough cash to make a down payment of at least 20%. Even though the interest is tax-deductible, you are still giving money to the bank to the month that will be accumulating in your bank account once the loan is paid off. And, that’s a better situation than any tax deduction.