Mortgage Interest Deduction: Maximize Your Tax Benefits

Mortgage interest deductions can save you more come tax time. If you have a home mortgage, checking whether you qualify for a mortgage deduction could help you save a thousand dollars or more. While mortgage interest deductions could save you money, they won’t offset high interest rates nor are they a dollar-for-dollar deduction. Read on to understand how these deductions work and how much you could save. 

What Is the Mortgage Interest Deduction?

A mortgage interest deduction is an allowable tax deduction from the IRS. It is available to homeowners who pay mortgage interest and itemize their federal income tax returns. You can also make mortgage interest deductions on state income tax. This will allow you to deduct a percentage of the interest paid. You can also take this deduction on loans for second homes, as long as it stays within IRS limits.

How Does the Mortgage Interest Tax Deduction Work?

With a mortgage deduction, you can reduce a percentage of payments made toward mortgage interest if you itemize your federal tax returns and don’t take the standard deduction. A mortgage interest tax deduction is commonly confused with a tax credit. A tax credit reduces taxes dollar for dollar. A deduction reduces a percentage of what you owe. 

Suppose you paid $10,000 in interest toward a mortgage over a year. If your tax bracket is 24%, you could deduct 24% of the mortgage interest paid from your taxes. You’d get a deduction of $2,400. 

That is less than the standard deduction, so unless you have significant other expenses you’re allowed to deduct, the standard tax deduction would save you more than the savings on $10,000 paid in mortgage interest. 

You can only deduct a percentage of the interest paid, not payments toward the principal. That means your interest payments are unlikely to be exactly $10,000. They might be $9,579 or $10,039 and will change each year as the mortgage shifts from higher payments on principal to more on interest. 

How Much Can You Deduct with Your Mortgage Interest?

How much you can deduct with your mortgage interest depends on your income tax bracket, the amount paid in mortgage interest and whether you itemize deductions. Generally, you can deduct a percentage of the interest paid. If you paid $10,000 in interest and are in the 24% tax bracket, you can deduct $2,400 from the total taxes due. 

That sounds amazing, but it’s not the great savings it looks like at first glance. The standard deduction for an individual in 2023 is $13,850. That will save you $3,324 in taxes in the 24% tax bracket, more than the itemized deduction. The mortgage interest deduction can make sense if you have significant other expenses to itemize. 

What Qualifies for the Mortgage Interest Deduction?

According to the IRS, to qualify for the mortgage interest deduction, a qualified home must secure your debt, either your first or second home. You could also deduct mortgage points, home equity loan interest and other related payments. 

1. Mortgage Interests for Your Primary and Secondary Homes

Mortgage interest for your primary and secondary residences is the primary qualification for the mortgage interest deduction. Homes, as defined by the IRS, include “a house, condominium, cooperative, mobile home, house trailer, boat or similar property that has sleeping, cooking and toilet facilities.”

Deductions are limited to interest charged on the first $1 million of debt for homes bought before Dec. 16, 2017, and $750,000 for homes bought after.

2. Mortgage Points You Paid

Mortgage points are also deductible but are generally not fully deductible in the year paid. Instead, eligible taxpayers should plan to deduct them over the loan repayment term. You’ll have to itemize taxes to deduct mortgage points, and it may be necessary to work with a certified public accountant (CPA) or tax professional to ensure you’re correctly deducting mortgage points. 

3. Home Equity Loan Interest

Home equity loan interest also qualifies for the mortgage interest deduction. According to the IRS, interest payments for home equity loans or a home equity line of credit are tax deductible if the proceeds are used to buy, build or substantially improve the property securing the home equity loan.

4. Prepayment Penalties

Some lenders charge a prepayment penalty if you pay off your mortgage early. You can deduct a prepayment penalty as mortgage interest. However, this doesn’t apply to any other service fees or additional costs from the loan. 

5. Late Mortgage Payment Charges

Late mortgage payment charges can also count toward mortgage interest deductions. As long as the charge wasn’t for a specific service, you can deduct any late payment charges. 

However, making a late payment for the deduction is not a good idea. It can harm your credit score and could lead to other penalties. Likewise, unless you have additional deductions, you won’t save more with these deductions than the standard deduction. 

6. Interest You Paid Before Selling Your Home

You can deduct any interest you paid before you sold your house as a mortgage interest deduction. That means if you sell your home in September, you can deduct interest payments from January through August of that year. 

What Doesn’t Qualify for the Deduction of Mortgage Interest?

Not all home expenses or mortgage-related expenses qualify as deductions of mortgage interest. Expenses that aren’t allowed for mortgage interest deductions include:

• Mortgage insurance premiums
• Homeowners insurance
• Closing costs
• Title insurance
• Moving expenses
• Extra principal payments on the mortgage
• Settlement costs
• Deposits, down payments or earnest money that you forfeited
• Interest accrued on a reverse mortgage

Likewise, renting out your home or using it for business purposes may not qualify for a mortgage interest deduction, although it might qualify for other business deductions. 

How to Claim Your Mortgage Interest Tax Deduction

If you are qualified for the mortgage interest deduction, here are the simple steps to claim it:

1. Calculate the Deductible Amount

Calculate the total amount of mortgage interest you paid throughout the year. This can typically be found on your Form 1098. Ensure that the interest amount meets the maximum threshold set by the IRS.

You will get a Form 1098 if you paid $600 or more mortgage interest during the year. Suppose your total interest paid for the year was $5,423, and you’re in the 24% tax bracket. That means you’ll be able to deduct $1,301.52 in taxes. 

2. Report on Schedule A (Form 1040)

To claim a mortgage interest deduction, you must Itemize your deductions on Schedule A of your federal tax return. If applicable, include the deductible mortgage interest amount and other eligible deductions, such as property taxes and medical expenses. You’ll also need to spend more time on tax preparation, but there are several good tax software programs to simplify this process for you. 

3. File Your Tax Return 

Complete your tax return manually or using tax software, and submit it to the IRS. Ensure you accurately report the mortgage interest deduction to avoid any potential issues. Consider having a CPA or tax professional check your tax return to ensure accuracy in all information filed.

Taking Mortgage Interest Deductions

While mortgage interest deductions are often portrayed as a windfall for homeowners, their role is more modest but not negligible. Taking a mortgage interest deduction can give you extra savings if you have other significant tax-deductible expenses or nonprofit donations and itemize your tax return. 

Securing a lower mortgage interest rate will save you far more in the long term. Learn more about how mortgage interest rates work, how to shop for a mortgage and find the best current mortgage interest rates here. 

Frequently Asked Questions