What Is the Mortgage Interest Deduction? | The Ascent – The Motley Fool

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There are several potential tax breaks of homeownership, such as the ability to deduct your property taxes under the state and local taxes (SALT) deduction, or the ability to avoid capital gains tax on the profitable sale of your primary home.
One benefit that could be very valuable to homeowners year after year is the mortgage interest deduction. Here's a rundown of what the mortgage interest deduction is, how it works, and what you need to know about it.
The mortgage interest deduction allows qualified taxpayers who itemize deductions on their tax return to deduct the interest paid during the tax year on as much as $750,000 in mortgage principal (the original amount you borrow). The mortgage interest deduction can be one of the biggest tax benefits of owning a home.
Technically, the mortgage debt must meet the IRS definition of qualified personal residence debt for home mortgage interest to be deducted. Generally speaking, this means the mortgage has to fit into one of three categories:
Learn more: Best Mortgage Lenders
Here are some other useful things to know about how the deduction works:
It's also worth noting that the mortgage interest deduction is the same for single and married joint tax filers, as far as the limit goes. In other words, the mortgage principal limit is $750,000 regardless of whether one or two people are filing the tax return.
Read more: What Is Private Mortgage Insurance?
To be perfectly clear, the mortgage interest deduction can only be used by a homeowner if they choose to itemize deductions on their return. If you take the standard deduction, you cannot also deduct your mortgage interest.
For 2022, the standard deduction is $25,900 for married couples and $12,950 for single filers. If your itemizable deductions are above your standard tax deduction amount, it can be worth itemizing. These include mortgage interest, charitable contributions, qualified medical expenses, and a few others.
The standard deduction amounts are much higher than they were before the Tax Cuts and Jobs Act went into effect in 2018. And as a result, far fewer people claim the mortgage interest deduction than previously. Even so, with home prices and mortgage interest rates rising, it is sure to be a valuable deduction for many people. This is especially true for those who bought homes in 2022.
As an example, let's say that you have a $500,000 mortgage on your primary home and you pay $20,000 in interest during 2022. You can deduct that amount on your tax return if you choose to itemize deductions.
Here are two scenarios that demonstrate how to calculate the mortgage interest deduction. For either situation, you can use a mortgage interest tax deduction calculator to help determine your potential tax break.
If your original mortgage principal balance is lower than the maximum for the mortgage interest deduction ($750,000 or $1 million, depending on when you bought), here's how the calculation works.
Your mortgage servicer will send you a tax form called a 1098 soon after the end of the year, and it will show how much interest you paid during the year. If you decide to itemize deductions, you can deduct the entire amount.
On the other hand, if your mortgage principal is in excess of your applicable limit, the deduction gets a little more complicated. For example, let's say you bought a home in 2020 and got a $900,000 mortgage. Your interest would be prorated for the purposes of the deduction so you're only deducting interest on the first $750,000 in principal.
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The IRS provides worksheets to help calculate your deduction. But if you aren't 100% sure, consult with a tax attorney, CPA, or other licensed tax professional.
The tax savings depends on your personal situation. Factors such as your marginal tax rate, mortgage principal, interest rate, and how much your other itemized deductions are all play a role.
As an example, say you paid $20,000 in qualified mortgage interest this year with your monthly mortgage payment and you're a married couple in the 24% marginal tax bracket. In that case, your deduction could be worth up to $4,800. But as mentioned, there are a lot of variables that come into play.
For instance, if you have no other itemizable deductions, your mortgage interest wouldn't save you any money at all. In this case, the standard deduction is greater.
The easy answer is that the mortgage interest deduction doesn't phase out. No matter what your income, you can deduct interest on a qualified mortgage if you itemize.
However, it's worth noting that the mortgage insurance deduction does phase out over $100,000 in adjusted gross income.
Homeownership can have a lot of benefits, and the mortgage interest deduction could be one of them. If you're new to home buying or just looking for more information, check out our first-time home buyer guide to learn more.
The mortgage interest deduction allows homeowners who itemize their deductions on their tax forms to deduct their interest on qualified personal residence debt.
Depending on when you bought your home, you may be able to deduct the interest on as much as $750,000 or $1 million of qualified principal.
The mortgage interest deduction can be used to lower your taxable income if you own a home and itemize deductions. For example, if you paid $15,000 in mortgage interest on a qualifying type of loan in 2022, you'll be able to deduct it as an itemized deduction when you file your tax return in 2023.
Fortunately, most tax preparation software will do the heavy lifting for you. Shortly after the end of each year, your mortgage lender will send you a Form 1098 that shows how much interest you've paid. If you choose to itemize, the deduction will be used to reduce your taxable income, which means that less money will be applied to the tax brackets to determine your tax bill.
Your tax savings depends on your specific situation. It's affected by things like your marginal tax rate, mortgage principal, interest rate, and how much your other itemized deductions are.
The mortgage interest deduction doesn't phase out. Regardless of your income, you can deduct interest on a qualified mortgage if you itemize. However, if you pay mortgage insurance, that portion of the deduction does phase out at adjusted gross income of $100,000 or greater.
Matt is a Certified Financial Planner® and investment advisor based in Columbia, South Carolina. He writes personal finance and investment advice for The Ascent and its parent company The Motley Fool, with more than 4,500 published articles and a 2017 SABEW Best in Business award. Matt writes a weekly investment column (“Ask a Fool”) that is syndicated in USA Today, and his work has been regularly featured on CNBC, Fox Business, MSN Money, and many other major outlets. He’s a graduate of the University of South Carolina and Nova Southeastern University, and holds a graduate certificate in financial planning from Florida State University.
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