![]() ![]() The deduction doesn’t apply to the mortgage principal, nor the down payment, nor mortgage insurance premiums (after tax year 2021). We’re talking about the interest portion of your mortgage payment that you make each month. If you have a home loan, the mortgage interest deduction allows you to reduce your taxable income by the amount of interest paid on the loan during the year, along with some other related expenses.īut let’s be clear on our terms. Here’s a guide to help you understand the mortgage interest deduction, and what you need to know for tax filing. Now, though, deducting mortgage interest primarily benefits taxpayers with large loans, hefty interest payments - and a slew of other deductions that they itemize on their returns. The mortgage interest deduction once was generous enough that most homeowners could use it. Mortgage interest can be tax-deductible, but the IRS rules regarding the tax deductibility of mortgage interest have gotten very complicated. Unfortunately, it’s harder to take advantage than it used to be. The deduction can apply to costs related to mortgage interest, such as mortgage points.īuying a home has never been more expensive, but there is a benefit that takes some of the sting out of homeownership: You might be able to take advantage of the mortgage interest deduction to lower your tax bill. To claim this deduction, you need to itemize - you cannot take the standard deduction.ĭeductions are limited to interest charged on the first $1 million of mortgage debt for homes bought before December 16, 2017, and $750,000 for homes bought after that date. After the TCJA, home equity loans are now included within the mortgage’s principal limit, and interest is only deductible if used to build or improve a qualifying residence.IRS rules may let you deduct interest paid on your mortgage on your income tax return. ![]() ![]() Prior to the TCJA, interest on up to $100,000 of home equity loans was deductible in addition to interest paid on up to $1 million in principal and could be used for expenses like credit card debt or tuition. The new law also changed the treatment of home equity loans. The TCJA reduced the amount of principal available for the mortgage interest deduction from $1 million to $750,000. Recent Changes to the Mortgage Interest Deduction While the total value of the deduction went down due to the TCJA, the share of benefits is now more concentrated among high-income taxpayers due to more taxpayers opting for the more generous standard deduction. Taxpayers making over $200,000 will make up 34 percent of claims and take 60 percent of the benefits. For example, estimates for 2018 show that less than 4 percent of taxpayers earning under $50,000 will claim the deduction, and these taxpayers will receive less than 1 percent of the tax expenditure’s overall benefits. The benefits of the deduction go primarily to high-income taxpayers because high-income taxpayers tend to itemize more often, and the value of the deduction increases with the price of a home. Who Takes the Mortgage Interest Deduction? There is, however, evidence that the deduction increases housing costs by increasing demand for housing among itemizing taxpayers. Though the deduction is often viewed as a policy that increases the incidence of homeownership, research suggests it does not accomplish this goal. The current $750,000 limitation was introduced as part of the Tax Cuts and Jobs Act (TCJA) and will revert to the old limitation of $1 million after 2025. Notably, no matter when the debt was incurred, taxpayers may not deduct any mortgage interest debt whose proceeds did not go toward the construction, purchase, or improvement of a home (Internal Revenue Service, “Publication 936: Home Mortgage Interest Deduction”). Home equity loan interest is deductible if the borrowed funds are used to build or improve a qualifying residence and contribute to the $750,000 cap. It allows taxpayers to deduct interest paid up to $750,000 ($375,000 for married filing separately) worth of principal (the original amount borrowed) on either their first or second residence. The deduction for mortgage interest is available to taxpayers who choose to itemize. How Does the Mortgage Interest Deduction Work? The Tax Cuts and Jobs Act reduced the amount of principal and limited the types of loans that qualify for the deduction. ![]() It reduces households’ taxable incomes and, consequently, their total taxes paid. The mortgage interest deduction is an itemized deduction for interest paid on home mortgages. ![]()
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