Homeownership isn’t just an American dream for some. It can also have tax benefits, one being mortgage interest deductions. However, not all homeowners can claim this tax deduction, and the rules can be complicated. For example, how much you can deduct may depend on when you bought your home and your filing status. Additionally, deducting mortgage interest is not the right choice for everyone.
Now that tax season has begun, here’s what you need to know about claiming the mortgage interest deduction on your federal income tax return.
What is mortgage interest deduction?
The mortgage interest deduction allows homeowners to deduct the interest they pay on their home mortgage from their taxable income. This can help homeowners lower tax rates by reducing their taxable income.
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However, taxpayers can only deduct mortgage interest if they itemize deductions. This means that you cannot claim the standard deduction and mortgage interest deduction in the same tax year.
Is it worth itemizing to deduct mortgage interest? It doesn’t make sense to take the mortgage interest deduction if your total itemized deductions (which may include mortgage interest, charitable contributions, state and local income taxes etc.) is less than 2023 standard deduction for your filing status.
- For 2023, the standard deduction is $13,850 for married filing separately and single filers.
- Head of household filers have a standard deduction of $20,800 for the 2023 tax year.
- If you’re married and filing jointly or filing as a qualifying widow, your 2023 standard deduction jumps to $27,700.
Limited mortgage interest deduction
As stated earlier, your mortgage interest deduction limit depends on when you bought your home and your filing status.
- If you bought your home before December 16, 2017 and are a single or joint filer, you can deduct the interest paid on the first $1 million of your mortgage.
- If you’re married and filing separately, your allowable mortgage interest deduction is limited to the interest paid on the first $500,000, even if you bought the home before December 17, 2017.
- For homes purchased after the above date, the allowable mortgage interest tax deduction is reduced to interest paid on the first $750,000 for single and joint filers and to $375,000 for married couples filing separately.
(Note: If you purchased your home after December 15, 2017, you may qualify for the exception. According to IRSa taxpayer who “entered into a written binding contract before December 15, 2017, to complete the purchase of a principal residence before January 1, 2018, and who purchased such residence before April 1, 2018, is considered to have acquired the house. taking out the loan before December 16, 2017”.)
What mortgage interest is tax deductible for 2023?
To take the mortgage interest deduction, the interest paid must be on a “qualified home.” Your first and second home can be considered qualifying homes, but there are some exceptions.
- If you are renting out your second home, the home only qualifies if you use it “for more than 14 days or more than 10% of the number of days in the year that the home is rented out at a fair rental, even which is higher.”
- If you have more than one second home, you can use one of them as a qualifying second home during the tax year.
- If you have a home office of your home, your property will still be considered a qualifying home. However, you should allocate the use of your home.
- A home under construction is not considered a qualifying home unless it becomes a qualifying home when it is ready for occupancy.
- A home under construction will not be considered a qualifying home for a period longer than 24 months.
- If you rent a portion of your home, the home does not qualify if you rent to more than two tenants during the tax year or rent a place in the house that has its own sleeping, cooking , and toilet facilities.
(Note: Multiple tenants with the same bedroom are considered one tenant by the IRS.)
Eliminate mortgage interest
You can deduct more than the interest paid on your qualifying first and second homes. Here are some expenses that may be tax deductible:
- Late payment charges
- Prepayment penalties (if there are additional costs for paying your prepayment early)
- Interest on a home equity line of credit (HELOC) used to develop a qualified home.
- Points paid (may be called loan origination fee, maximum loan payment, loan discount, or discount points)
Not all points are fully deductible. The IRS provides a flowchart which will help you determine if your credit scores are fully deductible for the 2023 tax year.
What expenses do not qualify as mortgage interest? Expenses you can’t claim as a mortgage interest tax deduction include homeowner’s insurance, mortgage insurance premiums, and title insurance. Here are some other expenses that are not tax deductible.
- Unpaid reverse mortgage interest
- Down payments
- Closing costs
- Appraisal and notary fees
- Closing costs
- Interest on HELOC loans where the funds are not used to improve your qualifying property
How to claim a mortgage interest deduction
If you paid more than $600 in mortgage interest last year, watch out for a Form 1098 from your mortgage lender in the coming weeks, (early 2024). A copy of this form will also be sent to the IRS. In most cases, homeowners can report the amount on this form on line 8a Schedule A (Form 1040). However, the allowable amount of the deduction may vary in certain circumstances, such as when the property is not considered a qualified home.
Remember that you must itemize your deductions if you choose to take the mortgage interest tax deduction. This can make preparing your taxes more complicated than if you took the standard deduction, so you may find it helpful to work with a tax professional to speed up the process.
For more information about claiming the mortgage interest tax deduction, see the IRS Publication 936.