Interest Deductions

When you buy a home, you might not be thinking about the tax benefits of mortgage interest deduction. However, you can save hundreds, even thousands of dollars each year with a home mortgage interest deduction.

You can take out a mortgage interest deduction under certain circumstances. If you do your taxes using itemized deductions, the IRS will let you take a mortgage interest deduction. However, you must have paid interest, been legally responsible for the loan, and secured the loan with your home.

To use mortgage interest as a deduction from income tax, you have to meet some qualifications. First, in order to be able to make a mortgage interest tax deduction, you have to be the one that is legally responsible for the loan. You are not allowed to deduct interest from a loan in someone else’s name.

Another qualification in deducting mortgage interest is that it has to be a secured debt for a home that meets the qualifications. The property must either be your main home or a second property. Buildings that are rented out or that are business properties are not eligible. If you have a home office for work, that portion of the house can be used as a business expense deduction.

Lastly, in order to start deducting mortgage interest from taxes, you must file a 1040 with itemized deductions. No short forms here! You can consider using tax software or having a CPA help you with this if needed.

You should be aware that your mortgage interest deduction benefit does have limits. You can usually deduct all of the interest you paid on the loan. Loans that were started before October 13, 1987 are grandfathered into the program, while those following do have caps on the qualifying mortgage interest deductions that you can take. For home equity loans used to purchase, build, or make renovations at a home, the entire deduction can be up to $1 million when filing jointly. Other home equity loans will qualify up to $100,000.

Keep in mind that interest deduction laws change every year. You can get home mortgage interest deduction spreadsheets from tax filing programs, or talk to your accountant about the laws and requirements. They will let you know about any laws regarding mortgage interest deduction after death and other topics. The IRS also puts out annual publications.

The average tax deduction for mortgage interest is approximately $9500, so learning to do this interest deduction can help you save money each year on your taxes.