The Home Mortgage Interest Deduction: What It Is and How It Works
The home mortgage interest deduction, which allows you to deduct the interest you pay on your mortgage from your taxable income, can add up to significant savings at tax time. It’s just one of the perks of homeownership, but it doesn’t apply to everyone with a mortgage — and the savings offered won’t always be significant. We’ll cover everything you need to know about who qualifies and how to calculate how much you can save.
What is the home mortgage interest deduction?
The home mortgage interest deduction is a rule that allows homeowners to deduct the interest paid on a home loan in a given tax year, lowering their total taxable income. 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.
In most cases, the deduction applies to interest paid only up to a certain maximum amount, which is based on when you took out your loan and whether you are filing with a spouse.
What’s deductible: Loans and expenses that qualify
Mortgages used to buy a primary home or second home, including refinanced mortgages
Important rules and exceptions:
- The maximum amount you can deduct is $750,000 for individuals or $375,000 for married couples filing separately.
- If you took out your home loan before Dec. 16, 2017, the maximum you can deduct goes up to $1 million for individuals and $500,000 for married couples filing separately.
- If your loan is from before Oct. 14, 1987 it’s considered “grandfathered” debt and is subject to no limits nor rules about how the funds were used.
Mortgages used to build or improve your primary home or a second home.
Exceptions: If you used the loan to repair rather than improve your home, it’s not deductible.
Home equity debt on a primary home or second home.
Exceptions: The interest paid on home equity loans, home equity lines of credit (HELOCs) and the cash portion of cash-out refinances aren’t deductible if the funds were used for anything other than buying, building or substantially renovating your home.
Should I deduct my mortgage interest?
The key thing to understand about the home mortgage interest deduction is that it only applies if you are itemizing your deductions — and for most people, it doesn’t make financial sense to do so. Most homeowners will save more money at tax time by taking the standard deduction instead of itemizing.
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 in 2022 are $12,950 for individuals, $25,900 for married couples and $19,400 for unmarried heads of households.
Suppose the interest you paid in the previous year is higher than your standard deduction amount. In that case, you could save money by itemizing each of the deductions you qualify for, including the mortgage interest tax deduction. Consult a tax professional for additional guidance.
How is mortgage interest calculated?
It’s certainly easiest to use a mortgage payment calculator to work out your mortgage interest, but if you’d like to calculate it by hand, here’s the formula:
The mortgage interest deduction doesn’t allow you to reduce how much you’ll pay in taxes by the exact dollar amount you paid in mortgage interest — it doesn’t work “dollar-for-dollar” the way a mortgage tax credit does. Instead, you’ll reduce your tax bill indirectly by reducing your taxable income. Schedule A of IRS tax form 1040 guides you step by step through the calculations you’ll need to determine how much mortgage interest you can deduct.
How to claim the home mortgage interest deduction
Wait for your tax form(s)
Your mortgage lender will send you a form, called Form 1098, that details the amount of mortgage interest you paid over the year. Review the amount of interest listed as paid in Box 1. If you paid less than $600 in interest, your lender isn’t required to send you this document. Otherwise, you should receive a separate 1098 for each loan you’re still paying off.
Determine whether to itemize
Compare the standard deduction amount to your total deductible mortgage interest, plus other deductions. This will help you determine whether it makes sense to take the standard deduction or itemize your deductions. If your total itemized deduction exceeds the standard deduction amount for your tax filing status, you will save money by itemizing deductions.
Claim your deductions
If the total amount of your itemized deductions is higher than your standard deduction amount, you’ll likely want to claim the mortgage interest deduction and any other deductions you qualify for. To do this, you’ll need to fill out Schedule A of form 1040 and include it in your tax return.