Amy Fontinelle is a freelance writer, researcher and editor who brings a journalistic approach to personal finance content. Since 2004, she has worked with lenders, real estate agents, consultants, financial advisors, family offices, wealth managers.
Amy Fontinelle Personal Finance ExpertAmy Fontinelle is a freelance writer, researcher and editor who brings a journalistic approach to personal finance content. Since 2004, she has worked with lenders, real estate agents, consultants, financial advisors, family offices, wealth managers.
Written By Amy Fontinelle Personal Finance ExpertAmy Fontinelle is a freelance writer, researcher and editor who brings a journalistic approach to personal finance content. Since 2004, she has worked with lenders, real estate agents, consultants, financial advisors, family offices, wealth managers.
Amy Fontinelle Personal Finance ExpertAmy Fontinelle is a freelance writer, researcher and editor who brings a journalistic approach to personal finance content. Since 2004, she has worked with lenders, real estate agents, consultants, financial advisors, family offices, wealth managers.
Personal Finance Expert Caroline Basile Mortgages and Student Loans Deputy EditorCaroline Basile is Forbes Advisor’s student loans and mortgages deputy editor. With experience in both the mortgage industry and as a journalist, she was previously an editor with HousingWire, where she produced daily news and feature stories. She ho.
Caroline Basile Mortgages and Student Loans Deputy EditorCaroline Basile is Forbes Advisor’s student loans and mortgages deputy editor. With experience in both the mortgage industry and as a journalist, she was previously an editor with HousingWire, where she produced daily news and feature stories. She ho.
Caroline Basile Mortgages and Student Loans Deputy EditorCaroline Basile is Forbes Advisor’s student loans and mortgages deputy editor. With experience in both the mortgage industry and as a journalist, she was previously an editor with HousingWire, where she produced daily news and feature stories. She ho.
Caroline Basile Mortgages and Student Loans Deputy EditorCaroline Basile is Forbes Advisor’s student loans and mortgages deputy editor. With experience in both the mortgage industry and as a journalist, she was previously an editor with HousingWire, where she produced daily news and feature stories. She ho.
| Mortgages and Student Loans Deputy Editor
Updated: Apr 18, 2024, 3:22am
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To maximize your mortgage interest tax deduction, utilize all your itemized deductions so they exceed the standard income tax deduction allowed by the Internal Revenue Service. The federal standard deduction is high enough that you’re unlikely to claim the mortgage interest deduction unless you earn a significant income. If you do claim the deduction, you’ll get a bigger tax break the higher your income and the larger your mortgage, up to the $750,000 limit.
The mortgage interest tax deduction is a tax benefit available to homeowners who itemize their federal income tax deductions. States that assess an income tax also may allow homeowners to claim this deduction on their state tax returns, regardless of whether they itemize on their federal returns. New York is one example.
However, don’t confuse a tax deduction with a tax credit. A tax credit reduces how much tax you pay dollar for dollar. If you owe $1,000 and get a $100 tax credit, your tax bill drops to $900. If you get a $100 deduction, you only save a percentage of $100. If you’re in the 24% federal income tax bracket, your tax savings will be $24. You’ll still owe $976.
The name says it all: The mortgage interest deduction allows you to deduct only the interest—not the principal—you pay on your mortgage.
Let’s say your monthly mortgage payment is $1,500. You don’t get to deduct $1,500. Look at your mortgage statement and you’ll see that perhaps $500 of your payment goes toward principal and $1,000 goes toward interest. The $1,000 is the part you can deduct.
The interest you pay decreases slightly each month, with more of your monthly payment going toward principal. So your total mortgage interest for the year isn’t going to be $12,000; it might be more like $11,357 or $12,892.
In the later years of your mortgage, that same $1,500 payment may put $1,000 toward your principal and only $500 toward interest. The mortgage interest deduction saves you more in the early years.
At the end of each tax year, your mortgage lender or servicer will send a Form 1098 Mortgage Interest Statement, which discloses the amount of paid interest and points eligible for an itemized tax deduction.
You can include the interest paid from your primary residence and second homes. The IRS states that interest payments for home equity loans or a home equity line of credit are tax deductible when the proceeds are used to buy, build or substantially improve the property securing the loan.
Start by tallying up the interest payments from your main home and second home. If you’re eligible for the Mortgage Interest Credit on Form 8396, you must deduct the credit amount from your deductible interest.
You cannot deduct mortgage interest in addition to taking the standard deduction. To take the mortgage interest deduction, you’ll need to itemize. Itemizing only makes sense if your itemized deductions total more than the standard deduction.
Whatever tax savings you get from itemizing your mortgage interest are as a result of not only mortgage interest you pay, but also to your charitable donations, property taxes, mortgage insurance, state income tax or sales tax, and anything else you itemize.
What might your savings from itemizing look like under various scenarios? The savings vary a lot based on how much mortgage interest you pay and your filing status, as well as how much state tax you pay and how much your other itemized deductions add up to.
For example, if you’re married filing jointly and you have $19,000 in itemized deductions, including $5,000 of mortgage interest, you’re much better off taking the $24,400 standard deduction. In this case, if you itemize your mortgage interest deduction ends up being zero because it doesn’t reach the standard deduction limit. Yet, you could be single with only $17,000 in itemized deductions, including $5,000 in mortgage interest, and save more than $1,000 by itemizing because the standard deduction for single filers is $12,200.
The more your itemized deductions exceed the standard deduction and the higher your marginal tax rate, the more you stand to save. In fact, the mortgage interest tax deduction primarily benefits taxpayers making more than $200,000, according to the Tax Foundation, an independent, Washington, D.C.-based nonprofit organization.
Why? These households are more likely to itemize and to have large mortgages with lots of interest. They also have higher marginal tax rates that make deductions more valuable.
It’s not just the interest part of your monthly payment that qualifies for the mortgage interest deduction. You may also be able to deduct late payment fees, discount points and mortgage insurance premiums.
You can deduct the points you pay to reduce your mortgage interest rate either in the year you pay them or proportionately over the life of your loan. You can do the same for points the seller pays when you buy a home, or points you pay on a home equity loan or HELOC whose proceeds you use to build, buy or substantially improve your home.
Points you pay on a mortgage for a second home can only be deducted over the loan’s life, not in the year you pay them, however. Refinancing points usually also must be deducted over the loan’s life.
In 2019 and 2020, mortgage insurance premiums are tax deductible as mortgage interest, too. Private mortgage insurance, FHA mortgage insurance premiums, FHA up-front mortgage insurance, the VA funding fee, the USDA guarantee fee and the UDSA’s annual mortgage insurance all qualify.
However, this deduction phases out for married-filing-jointly taxpayers with an adjusted gross income (AGI) above $100,000 and single or married-filing-separately taxpayers with an AGI above $50,000. Once your AGI reaches $109,000 ($54,500), you can’t deduct mortgage insurance at all.
You can’t deduct the interest on a home equity loan or line of credit if you use the money for something other than building, buying or substantially improving your home. A substantial improvement is one that increases your home’s value, extends its useful life or adapts your home to new uses. Routine maintenance and repairs don’t count.
Likewise, if you do a cash-out refinance, you can’t deduct the interest on the cash you take out if you don’t use it toward home building, buying or improving.
If you use a home loan to pay off high-interest debt, buy a car, take a vacation or pay tuition bills, you can’t claim the deduction on that interest.
You also can’t deduct the interest on any portion of your mortgage debt that exceeds $750,000 ($375,000 for single taxpayers or married taxpayers who file separately) if you took out your mortgage in 2018 or later. (This rule has a lot of exceptions, but they don’t apply to most people.)
So, if you have one mortgage for $500,000 on your main residence and another mortgage for $400,000 on your vacation home, you can’t deduct the interest on all $900,000 of your mortgage debt just because it’s from two separate mortgages that are each less than $750,000.
If you have a second home that you rent out all year and never live in, you can’t deduct the interest for that home’s mortgage. You also can’t deduct mortgage interest on more than one second home.
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Homeowners who take out large mortgages can’t deduct as much as they could before President Trump signed the Tax Cuts and Jobs Act (TCJA) in December 2017.
Interest on pre-TCJA mortgages totaling up to $1 million ($500,000 for single taxpayers or married taxpayers who file separately), plus interest on home equity loans and HELOCs totaling up to $100,000, is still deductible.
If you’ve closed on a mortgage on or after Jan. 1, 2018, you can deduct any mortgage interest you pay on your first $750,000 in mortgage debt ($375,000 for married taxpayers who file separately). In other words, if you have a mortgage for $800,000, you can only deduct the interest on $750,000. Home equity debt is included in this new limit. The TCJA applies through the 2025 tax year.
The mortgage interest deduction benefits far fewer households under the new law. The TCJA nearly doubled the standard deduction, and fewer people itemize as a result. Even before the change, only 20% of taxpayers claimed the home mortgage interest deduction. In 2018, only about 8% of homeowners claimed this deduction.
The TCJA also made it harder for homeowners to maximize the mortgage interest tax deduction by limiting the deduction for state and local income taxes (SALT) to $10,000 when there was previously no limit. The property taxes homeowners pay fall into that category. So, for some homeowners in states with high property, income and/or sales taxes, limiting the SALT deduction also limited their itemized deductions, making the mortgage interest deduction less valuable.
These changes are all federal tax changes, however, and your state’s laws may be different. California, for example, still allows taxpayers to deduct interest on mortgages up to $1 million. State tax rates are lower than federal tax rates, though, so the deduction is more valuable at the federal level.
Eligible homeowners can claim the mortgage interest tax deduction on Schedule A of their annual tax returns. Schedule A accompanies Form 1040 or 1040-SR (a simplified 1040 for seniors).
To find out how much mortgage interest you paid during the year, look at your mortgage interest statement, IRS Form 1098. Your lender will send one copy of this form to you and one copy to the IRS. You’ll receive it in January or February each year.
IRS Publication 936, updated annually, contains all the information most taxpayers will need to determine their eligibility for the mortgage interest tax deduction. Taxpayers with complex situations may need to ask a Certified Public Accountant for help.
The mortgage interest tax deduction can make borrowing money to buy a home slightly less of a financial burden, especially if you have a high income and a large mortgage. The deduction is not a reason to get a mortgage or to keep a mortgage you’re ready to pay off. For most people, it’s also not a reason to stretch your homebuying budget.
There are lots of exceptions to the standard mortgage interest tax deduction rules, but the guidelines above should help most people understand whether they’re eligible for this deduction and will benefit from it.
Forbes Advisor Mortgages Writer Josh Patoka contributed to this article.
