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Mortgage Interest Deduction: What’s Deductible in 2021?

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Homeownership comes with several perks, and among them is the ability to deduct the interest you pay on your mortgage. The home mortgage interest deduction allows you to reduce your taxable income by the amount of interest paid on up to $750,000 in mortgage debt — in many cases — during the previous year, which can add up to significant savings come tax time.

What is the home mortgage interest deduction?

The home mortgage interest deduction is used to deduct the interest paid on a home loan in a given year. Taxpayers can deduct the interest paid on mortgages secured by their primary residence (and a second home, if applicable) for loans used to buy, build or substantially improve the property.

Since the Tax Cuts and Jobs Act of 2017 was enacted, taxpayers who took out a mortgage after Dec. 15, 2017 can deduct only the interest paid on up to $750,000 of their mortgage debt, or $375,000 for married couples filing separately. The mortgage interest deduction limit for home loans originated before Dec. 16, 2017, is $1 million for individuals and $500,000 for married couples filing separately.

Your mortgage lender should send you a Form 1098 — a mortgage interest statement — by Jan. 31, which details the mortgage interest you paid during the year prior. If you have more than one mortgage, including a home equity loan or home equity line of credit (HELOC), you should receive a Form 1098 for each loan.

Keep your total interest amount in mind and compare it to the standard deduction for your taxpayer filing status. For example, the standard deduction amounts for individual taxpayers in 2020 and 2021 are $12,400 and $12,550, respectively.

If the interest you paid in the previous year is higher than your standard deduction amount, you’ll want to itemize each of the deductions you qualify for, including the mortgage interest tax deduction. Otherwise, it’s likely more beneficial to take the standard deduction. Consult a tax professional for additional guidance.

Can I deduct mortgage interest?

The interest portion of your monthly mortgage payment isn’t the only interest you’re permitted to deduct from your tax bill. Here are other types of deductible interest to keep in mind, according to the IRS:

  • Mortgage points, or prepaid interest, paid at closing
  • Late payment charges that aren’t associated with a specific loan service
  • Prepayment penalties assessed for early repayment of your loan
  • Interest paid on the mortgage before the sale date
  • Interest paid through participation in the Hardest Hit Fund and emergency homeowners loan programs

Is there a mortgage deduction for home equity loans?

There is a deduction for the interest paid on a home equity loan — the mortgage interest deduction. That’s right, the same deduction rules apply to second mortgages, better known as home equity loans and home equity lines of credit (HELOCs).

You can deduct only the interest paid on home equity loans or lines of credit if you borrowed the money to buy, build or substantially improve your main home or second home. Second mortgages used to consolidate debt, cover college expenses or fund some other financial goal won’t qualify for the mortgage deduction.

The same dollar limits discussed above for single taxpayers and married taxpayers filing separately — $750,000 and $375,000, respectively — apply to the total amount of loans secured by your primary home or second home. This includes both first and second mortgages.

For example, if you’re single, have a $400,000 mortgage on your main home and a $400,000 HELOC, you have $800,000 in mortgage debt. However, you can only deduct the interest paid on $750,000 of that amount.

A quick note about cash-out refinances: Unless you use your cashed-out equity to cover home improvements, the interest you pay for that portion of your refinanced loan isn’t deductible.

Claiming the home mortgage interest deduction in 2021

Prepare for the upcoming tax season by following these steps to claim the mortgage interest deduction on your 2021 tax bill:

  1. Wait for your mortgage interest tax form. Review the amount of interest paid in Box 1 on your Form 1098. If you paid less than $600 in interest, you likely won’t receive this document.
  2. Determine whether to itemize or take the standard deduction. Compare the standard deduction amount you qualify for to your total deductible mortgage interest and other deductible expenses. This will help you determine whether it makes sense for you to take the standard deduction or itemize your deductions instead. If your total itemized deduction amount doesn’t exceed the standard deduction amount for your tax filing status, then you wouldn’t itemize.
  3. Itemize your home mortgage interest. If the total amount of your itemized deductions is higher than your standard deduction amount, then you’d claim the mortgage interest deduction, plus any other deductions you qualify for, on Schedule A of your tax return.
 

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