14 June 2022 

TOPIC: Tax Strategy 

This is one of many guides that teaches you various tax-saving opportunities available. 

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Today you will be learning about mortgage interest deduction. You will find out what it is, who can qualify for the deduction, and much more. Keep reading to learn about this tax deduction! 

What Is Mortgage Interest Deduction?

When you take out a loan for a home, you have to pay back that money plus interest. 

Mortgage interest deduction allows Americans who own their homes to reduce their tax bill by the interest paid on their home. 

This tax deduction is meant to encourage people to become homeowners. 

Who Can Qualify For it? 

You must own a “qualified home” and have a loan secured by that home. 

What is considered a “qualified home”? 

In short, your home must have sleeping, cooking, and toilet facilities. It doesn’t matter if the home is a mobile home, condominium, house trailer, boat, or something similar.

As long as your home has a place to cook and sleep and has a toilet, it is a qualified home. 

Note: A home equity loan also qualifies for this tax deduction. 

The mortgage has to be on your primary residence or second home.  Your primary home is where you spend most of the year living inside. 

If you own a secondary home, you must meet specific occupancy requirements to qualify for this tax deduction. 

How To Claim It? 

At the beginning of each year, your mortgage lender will send you a form 1098. 

The 1098 form will show the total of how much you paid in interest fees paid on your mortgage the previous year. 

To use this tax deduction, you will have to itemize your deductions. 

When you file your taxes, you must add up your mortgage interest payments plus any other expenses incurred throughout the year that are tax deductible. 

How Much Can I Save With Mortgage Interest Deduction? 

To understand how much you can save with this deduction, consider the tax-deductible interest payments under this tax law. 

Here’s a small list:

  • Late mortgage payment fees
  • Prepayment penalty fees 
  • Fees are paid for mortgage points. 
  • Interest on the home equity loan 
  • Interest on line of credit

Over the years, our government has been lowering the amount people can save with this tax deduction. 

Due to that, how much you can save in taxes will be based on when you got your mortgage. 

We can categorize this into three groups. 

Group 1

If you got your mortgage before October 13, 1987, you have no limits on how much you can deduct. 

You can deduct the total amount of interest paid. 

Group 2

If you got your mortgage between October 14th, 1987 to Dec 15th, 2017, you can deduct up to 1 million of mortgage debt. 

For example, if you got a mortgage worth 3 million dollars, you can only deduct up to 1 million of interest paid.

Group 3

If you got a mortgage on December 16th, 2017, or later, you can only deduct up to $750,000 of interest paid on the mortgage.

Is Mortgage Interest Deduction Worth It? 

How much you save on this deduction will also depend on how much you pay in interest. 

The bigger your mortgage and the higher your interest, the more valuable this tax deduction will be for you. 

However, you might find the tax deduction lacking if you don’t own a home with a big mortgage. 

Over 90% of Americans take the standard deduction when filing their taxes. 

That’s because, for most Americans, the standard deduction is higher than their itemized expenses. 

Considering that mortgage interest deduction is an “itemized deduction,” you have to ask yourself the following question: 

Is your itemized deduction more than the standard deduction? 

Note: The standard deduction is $12,550 for single filers, $25,100 for joint filers, or $18,800 for heads of households.

So if you’re married filing jointly and you don’t have personal expenses (mortgage interest included) that exceed $25,100, then you are better off taking the standard deduction.  

To Summarize

The mortgage interest deduction is a tax deduction used to help homeowners lower their taxable income. 

To claim this credit, you must own a qualified home and have a loan secured by the property. 

How much you will save on this loan largely depends on when you got the mortgage for your home and how much your interest payments are on the loan. 

In most cases, however, choosing the standard deduction over using this deduction might be more beneficial. 

Want to learn more about taxes? 

We created a blog explaining the difference between tax deductions and tax credits. 

If you haven’t read that blog, click the link below to dig in! 

Click Here