As mid-April rolls around every year, a lot of tax questions arise. Everyone wants to know what they can do to either decrease the amount of money they owe on their taxes or increase the return they get.
For homeowners, the Home Mortgage Interest Deduction (HMID) is a tax break that can yield some savings. Though there is a lot to understand in order to be able to take advantage of what it can do for you. So, let’s not waste any more time – and jump right into it.
Mortgage Interest Deduction: What is It?
In its most simplistic form, the mortgage interest deduction can allow you to deduct the amount of interest you have paid on your home loan throughout the tax year. Again, this is only for the interest paid – not the payments applied to the principal.
There have been slight changes over the years. In 1986, Congress held in place a law that allowed a tax break for mortgage interest. The stipulation is that the cap for the eligible loan principal is $1 million.
The latest change was made in 2017 under President Trump, with the cap being reduced to $750,000. Those homeowners who made their purchase prior to this 2017 change were grandfathered-in at $1 million. These amounts are split in half for those filers who are married and filing separately.
While many homeowners are excited to know that they can save money, it is necessary that they understand that not everyone can. They can either take the mortgage interest deduction on their taxes – or the standard deduction that every taxpayer is given. It is one or the other.
Currently, the standard deduction for someone filing as single is $12,950 in 2022 and $25,900 for those who are married and filing jointly. That means to benefit from an HMID, the amount of interest you can deduct should be greater than the standard deduction amount.
What is – and is not – Deductible?
Your mortgage is accruing interest and many of the payments you make throughout the year may be able to be included in your tax deductions. However, it is important to note that not every bit of what you pay out counts. Let’s break this down some more.
When preparing your taxes, you may want to deduct the following:
Interest on Your Primary Residence’s Mortgage
Whether it is a single-family home, apartment, condo, mobile home, etc., the interest of this primary residence can be deducted as long as this property is listed as collateral on the mortgage.
Interest on Your Second Home’s Mortgage
This second home must be listed as collateral on the mortgage for which you are deducting the interest.
Interest on a Home Equity Loan or Line of Credit
You can deduct the interest paid on your loan or HELOC if the money was used to add improvement to your home.
Prepaid Interest or Mortgage Points
If you chose to buy mortgage points when you took out your mortgage, you may be able to qualify for the deduction.
Late Payment Charges
Just like interest, these late payment charges can often be deducted. Though, incurring these charges is not something you want to do.
The following are other expenses that are not deductible.
Mortgage Insurance and Homeowner’s Insurance Premiums
You will not receive any tax breaks for paying your necessary insurance premiums.
Down Payments/Earnest Money
When buying a home, you provide a good faith deposit and a down payment. These are not deductible.
Reverse Mortgage Interest
On these types of loans, interest isn’t paid until the loan comes due. In the meantime, it is just accruing – and you are not paying for it. Therefore, it cannot be deducted.
Closing Costs. Any closing costs required to be paid as part of your real estate transaction cannot be deducted.
Expenses for Moving. Moving can be quite costly but the only ones who can benefit from tax breaks are those who are on active duty in the military.
Keep in mind that the above is just a brief overview of what can and cannot be deducted so that you can get a tax break. There are, of course, always exceptions. To make the most of your tax breaks for mortgage interest, it is best to speak to a tax advisor or skilled accountant.
How to Claim this Mortgage Interest Tax Break
Even though you qualify for a tax break on your mortgage interest, you are only going to benefit from it if you take advantage of it. And that means taking the time to itemize your deductions – and spending more time on your taxes.
You will receive a Form 1098 from your mortgage lender that will let you know the amount of interest you paid for the year. This will also include any other costs, fees, or points you paid for throughout the year that can be deducted.
When you receive this, you will want to determine whether you can get a bigger deduction with your interest paid – or with the standard deduction. If the latter is higher, then submitting your mortgage interest tax break just doesn’t make sense.
If you choose to move forward with the mortgage interest deduction, then you would turn your Form 1098 with your other tax information over to your accountant.
Learn More About Your Mortgage at Option Funding, Inc.
There are many different types of home loans that will allow you to take advantage of this interest tax break deduction, such as:
- Mortgages to buy
- Loans to build
- Home equity loans to improve your home
- Home equity lines of credit for remodels
- Second mortgages
- Refinancing
Working with the right lender and mortgage broker can help you secure the right financing for your real estate needs – with the option of future tax breaks.
Ahmad Azizi at Option Funding, Inc. offers you mortgage options and can help answer any questions you may have about the process, including mortgage interest tax breaks.
Contact Ahmad today!