Tax season offers the opportunity for homeowners to benefit from a number of ongoing and temporary tax breaks. Among them is the mortgage interest tax deduction, which has become an ingrained part of our society and viewed by many as making home ownership affordable to the middle class.
This year, the mortgage interest tax deduction is coming under scrutiny as the government looks for ways to cut costs and raise revenue. Here’s some of what you should know, based on information from the IRS, if you plan to benefit from the mortgage interest tax deduction:
What Types of Home Loans Qualify?
In order to take the mortgage interest tax deduction, you need to make sure you have a qualifying home loan. You can deduct the interest you pay from your taxable income, creating a situation in which your lower income results in paying a lower amount in taxes. Here are the loans that qualify for the mortgage interest tax deduction:
When you refinance, the rules are a little different. You can only deduct the interest on your original mortgage balance, plus $100,000 on top of that. So, if you have $120,000 left on your mortgage, and you do a cash-out refinance for $250,000, you can only deduct the interest as if it’s a $220,000 home loan (original 120,000 + additional 100,000). In some cases, you might over-deduct when refinancing. Consult a tax professional before you deduct interest after you have refinanced.
How Much Can You Deduct?
If you are married filing jointly, the IRS says you can get a tax deduction on up to $1 million in mortgage debt secured by a first or second home. Single filers can deduct up to $500,000. You can get an exception, though, if you pay cash for your home, and then use a home equity loan.
The mortgage interest tax deduction phases out as your income rises. This means that if you have a higher income, you can’t take the full deduction. Make sure you understand the phase out adjusted gross income, which changes each year, depending on inflation.
Itemizing Your Deductions
In order to take the mortgage interest tax deduction, you must itemize your taxes using schedule A. In some cases, the mortgage interest paid isn’t more than the standard deduction. However, if you are like me, you have other itemized expenses that can help your Schedule A deductions exceed the standard deduction.
Alone, my mortgage interest is not enough to make itemizing worth it. However, when combined with charitable donations and other deductions, my mortgage interest paid resulted in a $10,904.26 reduction of my taxable income. Looking at the 2010 tax table, I see that this deduction, taken on its own, keeps me in a lower tax bracket and saves me right around $1,703 in taxes. If you divide that by 12, it’s the equivalent of saving $141.92 a month on my mortgage. Not too shabby.
The mortgage interest tax deduction can be helpful if you itemize. Remember, though, that your deduction will diminish over time, since the amount you pay in interest decreases as you repay your mortgage.
Photo: Infrogmation via Creative Commons 2.0
Miranda Marquit is a journalistically trained freelance writer and professional blogger. She contributes to several personal finance web sites, writing on topics such as budgeting, home loans and mortgages, and investing.
Posts by guest bloggers represent their own opinions, and do not necessarily reflect the views of LendingTree/Tree.com.
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