Taxpayers with complex situations may need to ask a Certified Public Accountant for help. The mortgage interest tax deduction can make borrowing money to buy a home slightly less of a financial burden, especially if you have a high income and a large mortgage. Amy Fontinelle is a leading personal finance expert with nearly 15 years of experience.
Select Region. United States. United Kingdom. Amy Fontinelle. Editorial Note: Forbes Advisor may earn a commission on sales made from partner links on this page, but that doesn't affect our editors' opinions or evaluations. How the Mortgage Interest Deduction Works The name says it all: The mortgage interest deduction allows you to deduct only the interest—not the principal—you pay on your mortgage. Mortgage Interest and the Standard Deduction You cannot deduct mortgage interest in addition to taking the standard deduction.
What Qualifies for the Mortgage Interest Deduction? Was this article helpful? Share your feedback. Send feedback to the editorial team. Rate this Article. Thank You for your feedback! Something went wrong. Please try again later. Best Of. Types of Mortages. Mortgage Basics. More from. Mortgage Broker Vs. Loan Officer Vs. Claiming the mortgage interest deduction requires itemizing on your tax return.
If you bought the house after Dec. Look in your mailbox for Form Your mortgage lender sends you a Form in January or early February. It details how much you paid in mortgage interest and points during the tax year. Your lender sends a copy of that to the IRS, which will try to match it up to what you report on your tax return. Learn more about Form here. Keep good records.
The good news is that you may be able to deduct mortgage interest in the situations below under certain circumstances:. The bad news is that the rules get more complex.
Check IRS Publication for the details, or consult a qualified tax pro. Be sure to keep records of the square footage involved, as well as what income and expenses are attributable to certain parts of the house.
Taxpayers who do not have deductions that add up to more than the standard deduction amounts would not need to itemize, and, therefore, derive no tax benefit from paying interest on their mortgages. Even for homeowners who itemize their taxes and qualify for the mortgage interest tax deduction, the amount of the deduction is a mere fraction of the amount of interest paid on the mortgage.
Once again, a little number crunching is required to fully comprehend the situation because the deduction is not a tax credit. Worse yet, an honest assessment of the actual bottom-line savings should factor out the value of the standard deduction. The table below provides a comparison. The couple would get the tax reduction value of the standard deduction even if they do not have a mortgage. Taking the standard deduction would be far wiser than itemizing just to receive the mortgage interest tax deduction.
Even taxpayers in higher tax brackets would get no benefit, unless they have other high-dollar-value deductions to itemize. Structured this way, it is not surprising that a tax deduction arguably put in place to encourage home purchases tends to be used primarily by higher-income households.
Of the Additionally, there is a limitation in place on how much of your mortgage interest can be deducted. A slightly higher limit exists for indebtedness that was incurred prior to Dec. Rather than spending large amounts of money on interest for little in return, you would be far better off to pay cash for your new house.
A cash purchase will save you tens of thousands of dollars because you will not be paying interest. No investment out there will guarantee better returns than the amount you would save by avoiding interest payments altogether, so the conservative choice is clear.
Avoid making interest payments if you can. Pay off the house quickly if you cannot. Internal Revenue Service. Congress, Joint Committee on Taxation. Federal Reserve Bank of New York. Accessed Feb. Retirement Planning.
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