Approximately 63 percent of homeowners in the United States currently have a mortgage. Are you part of this group? Did you know you have some potential tax deductions available to you as a result?
The mortgage interest deduction can help you save some money on your annual tax bill, especially during your early years as a homeowner. A lot of people have questions about this deduction and how to claim it, though.
If you fall into this category yourself, keep reading. Explained below is everything you need to know about the mortgage interest deduction and how you can use it to your advantage.
What is the Mortgage Interest Deduction?
Originally, this tax deduction allowed homeowners to deduct the mortgage interest they pay on their first million dollars of mortgage debt.
According to the latest tax bill changes, though, if you bought a house after December 15 in 2017, you can deduct the mortgage interest you pay on the first $750,000 of your mortgage.
How Does It Work?
When it comes to claiming the mortgage tax deduction, the process is pretty straightforward, especially if your mortgage is worth less than $750,000.
You simply calculate the amount of money you spent on mortgage interest for the year (you can use the HAR mortgage calculator to make this easier) and then deduct that money when filing your taxes. Keep in mind that you have to itemize your deductions if you’re going to take advantage of the mortgage interest credit.
There’s also a caveat to the December 15 cutoff rule. If you entered into a written contract before this date with plans to close before January 1 in 2018, and you also closed on your house before April 1 in 2018, the IRS will deem your mortgage to have been obtained before December 15.
Who (and What) Qualifies for It?
If you’re planning on taking advantage of the mortgage interest deduction (and you definitely should), you might have questions about whether you qualify or what counts as mortgage interest. In general, you can deduct the mortgage interest paid on your primary home as well as your second home (if you have one). There are a few rules you need to keep in mind, though.
For the mortgage interest on your primary home, factor in these requirements:
- Your property is a house, condo, mobile home, apartment, co-op-, houseboat, or house trailer
- Your home has facilities for sleeping, cooking, and using the bathroom
- Your home is the collateral for your loan
You can deduct your mortgage interest even if you have a nontaxable housing allowance from the military or a ministry. You can also deduct the interest from a mortgage you use to buy out an ex-spouse and obtain half of a house during a divorce.
You can also deduct the mortgage interest you pay for your second home. This is the case even if you don’t use your home during the year, or if you rent it out (as long as you have spent at least 14 days in the house, or more than 10 percent of the number of days you’ve spent renting it out, whichever is longer). The only requirement here is that the house is collateral for your mortgage.
You can also deduct mortgage points, which are a type of prepaid loan interest. You can deduct points on a gradual basis throughout the lifespan of your mortgage. You can also deduct them all at once, assuming you meet specific requirements, including the following:
- The mortgage is for your primary home
- It’s an established practice to pay mortgage points in your area
- You don’t have an unusually high number of points
- You aren’t using the points for your closing costs
- You have a down payment that’s higher than your total number of points
- The points were computed as a percentage of the mortgage loan
- The points are listed on your settlement statement
- You use the cash method when you file your taxes
If all of this is true, you can deduct your mortgage points when filing your taxes. Keep in mind that you may need to talk to a tax professional to ensure you meet all the above qualifications.
What Can’t Be Deducted?
While you can deduct quite a bit when it comes to utilizing the mortgage interest deductions, there are still some things that are off the table.
For example, you can’t deduct mortgage insurance premiums or homeowners’ insurance premiums. Extra principal payments are off-limits, too, as are settlement costs, down payments, and the interest you accrue on a reverse mortgage.
How to Deduct Mortgage Interest
At this point, especially if you think your situation qualifies you for this deduction, you’re probably wondering how you go about deducting your mortgage interest.
In general, you simply need to consult your Form 1098, which your lender will send you in January or February. This form details how much money you paid in interest and mortgage points during the most recent tax year. Once you have this information, you’ll factor it in when filing your taxes and itemizing your deductions.
Don’t be afraid to work with a tax consulting service if you’re confused about how to do this.
If you want to ensure you’ve done everything correctly and are deducting the maximum amount possible (without breaking any rules, of course), a professional’s advice will come in very handy.
This is especially true if you have a unique situation. For example, if you were divorced, if your home was a timeshare, or if you used part of your house as a home office.
Start Deducting Mortgage Interest Today
You now know more about what the mortgage interest deduction is and how to deduct mortgage interest when filing your taxes. When the time comes to file your taxes, you may be able to deduct your interest and reduce the amount you ower by quite a bit.
If you’re not sure how to do this, or if you need help amending past tax returns so you can take advantage of the mortgage interest deduction, we’re here to help at Silver Tax Group. Contact us today for a case evaluation or to learn more about what we have to offer you.