MORTGAGE INTEREST DEDUCTION: Can You Deduct Mortgage Interest?

Mortgage Interest Deduction

Many homeowners look forward to one thing during tax season: deducting mortgage interest. This includes any interest paid on a loan secured by your primary or secondary house. A mortgage, a second mortgage, a home equity loan, or a home equity line of credit are all examples of this (HELOC). Continue reading to learn more about the home mortgage interest deduction, know if can deduct it and how to claim it on your taxes this year.

What Is a Mortgage Interest Deduction?

The mortgage interest deduction is an itemized deduction for mortgage interest paid. It lowers households’ taxable income and, as a result, their total tax burden. The Tax Cuts and Jobs Act limited the types of loans that qualified for the deduction and lowered the amount of principal that could be deducted.

How Does the Mortgage Interest Deduction Work In 2022?

The mortgage interest deduction allows you to decrease your taxable income by the amount of mortgage interest you paid during the year. So, if you have a mortgage, keep meticulous records – the interest you pay on your mortgage may assist reduce your tax burden.

As previously stated, you can generally deduct mortgage interest paid during the tax year on the first $1 million of mortgage debt for your primary home or a second home. If you bought the house after December 15, 2017, you can deduct the interest you paid on the first $750,000 of the mortgage throughout the year.

For example, if you acquired an $800,000 mortgage to buy a property in 2017, and then paid $25,000 in interest on that loan during 2021, you can presumably deduct all $25,000 of that mortgage interest on your tax return. However, if you have an $800,000 mortgage in 2021, that deduction may be reduced. This is because the 2017 Tax Cuts and Jobs Act limited the deduction to the first $750,000 in mortgage interest.

There is an exemption to the Dec. 15, 2017, deadline: If you entered into a written binding contract before that date to close before Jan. 1, 2018, and you closed on the house before April 1, 2018, the IRS considers your mortgage to have been obtained before Dec. 16, 2017.

Can You Deduct Mortgage Interest?

The interest component of your monthly mortgage payment isn’t the only sort of interest you can deduct from your tax bill. According to the IRS, there are several more categories of deductible interest to consider:

  • Mortgage points, also known as prepaid interest, are paid at the time of closing.
  • Late payment penalties that are unrelated to a specific loan service
  • Prepayment penalties are applied if you return your loan early.
  • The mortgage interest was paid prior to the sale date.
  • Participation in the Hardest Hit Fund and emergency homeowner loan programs result in interest payments.

How the Mortgage Interest Deduction May Not Be Beneficial

The Tax Cuts and Jobs Act (TCJA) increased the standard deduction for single taxpayers to $12,200 and for married couples filing jointly to $24,400. The standard deduction has been increased to $12,550 for single filers and $25,100 for joint filers for the 2021 tax year. Prior to the TCJA, the standard deduction was $6,350 for single filers and $12,700 for married couples filing jointly.

One of the aims of the TCJA was to make tax filing easier, and this massive rise makes itemizing deductions, including mortgage interest, obsolete. For many people, taking the standard deduction is significantly more tax-efficient.

Indeed, claiming the mortgage interest deduction is only worthwhile if you have a large mortgage or two mortgages (because you have a second home). In other words, in most cases, the deduction is a gift to the wealthy. However, astute investors may be able to take advantage of this deduction break.

Is a Mortgage Deduction Available for Home Equity Loans?

The mortgage interest deduction allows you to deduct the interest paid on a home equity loan. That’s true, the same deduction rules apply to second mortgages, also known as home equity loans and HELOCs.

You can deduct the interest paid on home equity loans or lines of credit only if you used the funds to buy, develop, or substantially improve your primary or secondary residence. Second mortgages used to consolidate debt, pay for college, or fund another financial purpose are ineligible for the mortgage deduction.

The same monetary limits that apply to single taxpayers and married taxpayers filing separately — $750,000 and $375,000, respectively — apply to the total amount of loans secured by your primary home or second home. First and second mortgages are included.

For example, if you’re single and have a $500,000 mortgage on your primary home plus a $300,000 HELOC, your total mortgage debt is $800,000. However, you can deduct just the interest paid on the first $750,000 of that total amount.

What Constitutes Deductible Mortgage Interest?

A few payments you make may be considered mortgage interest. Here are a few to think about subtracting.

#1. Mortgage Interest On Your Primary home

This property could be a house, co-op, apartment, condo, mobile home, houseboat, or something else. However, the home will not qualify if it lacks basic living amenities such as sleeping, cooking, and toilet facilities. The property must also be declared as collateral for the loan from which interest payments are being deducted. This deduction can also be used if you secured a mortgage to buy out an ex’s part of the property in a divorce.

If you get a non-taxable housing allowance from the military or a ministry, or if you have received assistance through a State Housing Finance Agency Hardest Hit Fund, an Emergency Homeowners’ Loan Program, or other assistance programs, you can still deduct mortgage interest. You can, however, only deduct the interest you pay. You cannot deduct interest paid by another entity on your behalf.

#2. Mortgage Interest On A Second Home

This tax deduction can be used on a mortgage for a home that is not your primary residence as long as the second home is declared as collateral for the mortgage. Another caveat applies if you rent out your second home. You must dwell in the home for at least 14 days or 10% of the days you rent it out, whichever is greater. If you own more than one second home, you can only deduct interest on one of them.

#3. You Have Paid Mortgage Points

When you take out a mortgage, you may have the option of purchasing mortgage points. These points pay a portion of your loan interest in advance. Each point, which normally costs roughly 1% of the mortgage amount, can save you about.25 percent on your mortgage rate. Mortgage points are paid at the time of closing. They must be paid directly to the lender in order to be eligible for the deduction. In some cases, points might be deducted in the year they are earned. Otherwise, you must deduct them ratably over the life of the loan. If you have any questions, you should seek the advice of a tax specialist.

#4. Mortgage Late Payment Penalties

Late payment charges can be deducted as home mortgage interest as long as they are not for a specific service. However, just because you can deduct this, you should never make late mortgage payments. Doing so might result in credit score loss as well as other penalties.

#5. Penalties for Early Payment

If you pay off your mortgage early, certain lenders will charge you. You can deduct mortgage interest if you have to pay a prepayment penalty. However, the penalty must be incurred as a result of paying off the loan early. It cannot be incurred as a result of a service or additional cost incurred as a result of the loan. Prepayment penalties are not charged by Rocket Mortgage®.

#6. Home Equity Loan Interest

A home equity loan is money borrowed against the equity of your home. You can get it as a flat sum or as a line of credit. To qualify for the interest on a home equity loan, the money from the loan must be used to buy, build, or “significantly renovate” your home. The interest is not deductible if the funds are utilized for other reasons, such as purchasing a car or paying off credit card debt.

#7. Paid Interest Prior to Selling Your Home

If you sell your home, you can still deduct any interest paid prior to the home. So, if you sold your home in June, you can deduct interest paid from January to May or June, depending on when you made your last mortgage payment on the home.

#8. Mortgage Insurance Fees

Mortgage insurance premiums are fully deductible if your adjusted gross income (AGI) is less than $100,000 while filing single, jointly, or as head of household. Above $100,000, there is a phaseout ($50,000 if married filing separately). FHA MIP, conventional private mortgage insurance, USDA guarantee fees, and the VA funding charge are all examples of qualified mortgage insurance.

Although this deduction was initially repealed by the TCJA, Congress extended it through the 2020 tax year. Thus, it allows anyone who filed in the spring of 2021 to deduct their mortgage insurance premiums. However, Congress has yet to decide whether to renew the deduction in 2022.

What Isn’t Tax Deductible?

When you buy and own a home, mortgage interest isn’t the only expense you’ll have. Many people believe that these additional expenses are tax-deductible, however, they are not. Here is a summary of some of the most typical costs that are misclassified as tax-deductible:

  • Homeowners Insurance
  • Other closing expenses, such as title insurance
  • Moving costs (unless you are an active-duty military member)
  • You forfeited deposits, down payments, or earnest money.
  • A reverse mortgage’s interest rate. You can’t deduct interest you don’t pay until the loan is due since you don’t pay it until the loan is due.
  • Any payments made while residing in the home prior to the purchase’s completion. These payments are classified as rent.

Remember that the interest on a mortgage loan is only deductible if the home acquired with the loan is used as security. For instance, if you possess a rental property and borrow against it to buy a home, the interest does not qualify because the home is not used as collateral (the rental property is instead).

How to Claim the Home Mortgage Interest Deduction in 2022

Prepare for tax season by taking the following procedures to claim the mortgage interest deduction on your 2022 tax bill:

#1. Attend to Receive Your Mortgage Interest Tax Form.

Examine the interest paid in Box 1 of your Form 1098. You are unlikely to obtain this paper if you paid less than $600 in interest.

#2. Decide if You Want to Itemize or Take the Standard Deduction.

Compare your standard deduction amount to your total deductible mortgage interest, as well as any other deductions that apply to you. This will assist you in determining whether it is better for you to take the standard deduction or itemize your deductions. You would not itemize your deductions if your entire itemized deduction amount did not surpass the standard deduction amount for your tax filing status.

#3. Your Home Mortgage Interest Should Be Itemized.

If the sum of your itemized deductions exceeds the standard deduction level, you would claim the mortgage interest deduction and any additional deductions you qualify for on Schedule A of your tax return.

In conclusion

For more information about filing your 2022 tax return, contact your financial advisor or a tax professional. They can provide additional information regarding your mortgage interest deduction. They can also assist you in determining what to deduct based on your loan type and financial position.

Another approach to saving money is to refinance your mortgage to get better terms. If you’re interested, act now while interest rates are still low.

Mortgage Interest Deduction FAQs

Why can't I deduct my mortgage interest?

If the loan is not secured by your home, it is classified as a personal loan, and the interest you pay is typically not deductible. Your home mortgage must be secured by either your second home or secondary home. You cannot deduct mortgage interest on a third, fourth, or fifth home.

Can you still deduct mortgage interest on your taxes?

So, if you have a mortgage, keep meticulous records – the interest you pay on your mortgage may assist reduce your tax burden. As previously stated, you can generally deduct mortgage interest paid during the tax year on the first $1 million of mortgage debt for your primary home or a second home.

Is getting rid of PMI worth it?

If your savings outweigh your refinance closing expenses, it’s worth refinancing to remove PMI mortgage insurance. The current low-interest rate environment provides an opportunity to get out of a loan with higher interest rates while simultaneously reducing mortgage insurance.

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