What’s the mortgage interest deduction?

Mortgage interest deduction: This tax deduction allows you to deduct mortgage interest on mortgages over $1 million. For homeowners who purchased a house after December 15, 2017, they can deduct interest for the first $750,000 on their mortgage. To claim the mortgage interest deduction, you must itemize your tax return.

Let’s take a look at the process and see how you can save tax time.

How does the 2022 mortgage interest deduction work

You can reduce your taxable income through the mortgage interest deduction. This allows you to deduct the amount you paid in mortgage interest over the year. Keep good records if you have mortgages. The interest on your home loan may help reduce your tax bill.

You can generally deduct mortgage interest paid in the tax year for the first $1,000,000 of your mortgage debt. This applies whether you are financing your primary or secondary home. The interest paid on the first $750,000 mortgage can be deducted if the house was purchased after December 15, 2017.

If you have a $800,000.00 mortgage to purchase a house in 2017 and paid $25,000 interest during 2021, then you can probably deduct $25,000 of the mortgage interest from your tax return. This deduction may be smaller if you have a $800,000. mortgage in 2021. The 2017 Tax Cuts and Jobs Act restricted the deduction to interest on the first $750,000 mortgage.

The Dec. 15, 2017 cutoff is not applicable to you. If you have a signed binding contract prior to Jan. 1, 2018, and the closing date was April 1, 2018, the IRS will consider your mortgage as obtained before Dec. 16, 2017.

What is considered mortgage interest?

Interest on your mortgage for your main residence

  • A property could be a house or co-op.

  • The loan must be secured by the home.

  • A home must provide sleeping, cooking, and toilet facilities.

  • You can still deduct the interest on your home mortgage if you receive a nontaxable housing allowance through the ministry or the military.

  • You can get a mortgage to “buy out” your spouse’s share of the house after a divorce.

Interest on a second mortgage

  • The home doesn’t have to be used during the year.

  • The mortgage must be secured by the house.

  • You must be present for at least 14 days, or more than 10%, of the time you rented the second house.

Points that you have earned on your mortgage

  • Points are a type of prepaid interest that you can deduct from your loan. Points can be deducted gradually over the term of your mortgage or all at once if each of eight conditions are met.

  • The eight requirements for mortgages are: the principal home must be your primary residence, you must pay points if you are using the area’s established practice, your down payment must not exceed the points, and the points must be a percentage of the loan amount. The points will appear on your settlement statement. You use the cash method to account for your taxes.

Late payment fees on a mortgage payment

  • A late payment charge can be deducted if it was not for a particular service that is connected to your mortgage loan.

Prepayment penalties

  • While you might face a penalty if you pay off your mortgage early, you may be able to deduct interest from the penalty.

Interest on a Home Equity Loan

Mortgage insurance premiums

  • An insurance contract must be issued after 2006.

  • If your adjusted gross income exceeds $109,000 or $54,500 for married filing separately on Form 1040/ 1040-SR line 8b, you can’t deduct mortgage insurance costs.

  • You can only deduct the amount of your adjusted gross income that exceeds $100,000 ($50,000 for married filing separately).

What is not deductible

  • Homeowners Insurance

  • Additional principal payments that you make on your mortgage

  • Title insurance

  • Settlement costs (mostly the time)

  • You forfeit deposits, earnest money or down payments

  • Interest on a reverse mortgage

How do I claim the mortgage interest deduction

Follow these steps.

1. You will find a Form 1098 in your mailbox. In January or February, your mortgage lender will send you a Form 10.98. This form details the amount you paid in interest and points for your mortgage during the tax year. The 1098 is sent to the IRS by your lender. They will match it with what you report on tax return.

If you have paid $600 or more in mortgage interest (including points) over the course of the year, you will receive a 1098. Learn more about Form 1098. Your monthly bank statements may contain year-end information about your mortgage interest.

2. Maintain good records. You may be eligible to deduct mortgage interest for certain situations.

  • You rented a part of your house.

  • This was a timeshare.

  • A portion of the house was being built during the year.

  • You used part or all of your mortgage proceeds to pay off debts, invest in a company or buy something else.

  • Your house was damaged during the year.

  • If you were separated or divorced, you or your ex must pay the mortgage on a house you own. The interest could be considered alimony.

  • You or someone other than your spouse were jointly liable for and paid the mortgage interest on your house

Unfortunately, the rules are getting more complicated. For more information, consult IRS Publication 936 or a qualified tax professional. Keep track of square footage and income from certain areas of the house.

3. It’s important to itemize your taxes. The mortgage interest deduction is claimed on Schedule A of Form 1004, which means that you will need to itemize your taxes instead of taking the standard deduction.

This can lead to more tax prep time. However, if your standard deduction exceeds your itemized deductions you should itemize your deductions and still save money. You can save time and take the standard deduction if your standard deduction exceeds your itemized deductions, including your mortgage interest deduction. Learn more about itemizing and taking the standard deduction. )

Schedule A lets you do the math needed to calculate your deduction. The steps can be walked through by your tax software.

4. Check to see if you are eligible for special deduction rules. You may be eligible to deduct the entire amount you paid on your mortgage in the year if you received assistance from the state housing finance agency, “Hardest Hit Fund”, or an Emergency Homeowners Loan Program (the state or Department of Housing and Urban Development administers this).