Is mortgage interest tax deductible?

Is mortgage interest tax deductible?
(Image credit: Getty)

Working out which deductions can be included on your tax return is the tricky task that most Americans face when firing up their tax software each year. If you’re buying your home, mortgage interest could well be one of them, but with the rules around it changing in the Tax Cuts and Jobs Act – which has impacted returns filed since 2019 – there could still be some confusion. So, is mortgage interest tax deductible? Whether you’re claiming it for the first time or simply need a reminder, you’ll find the answers here.

What is the mortgage interest deduction?

The mortgage interest deduction is a tax benefit provided by the IRS. It allows homeowners to reduce their taxable income by the amount of interest they’ve paid on their mortgage over the year, reducing the amount of tax they owe. It’s an itemized deduction and applies to any “qualified residence loan” that’s used to purchase, build, or substantially improve the property, including refinance loans, provided you don’t cash out and use the loan for other means (the deduction doesn’t apply to reverse mortgages, as interest isn’t paid until the loan becomes due).  

What mortgage interest is deductible?

For those who have bought their home since December 16, 2017, the mortgage interest deductible limit for this tax year stands at $750,000. This limit applies to single filers and married couples who file jointly; married taxpayers who file separately can deduct up to $375,000 each. If your home was purchased prior to this date your mortgage contract still falls under previous rules, and you’ll be able to deduct the interest paid on mortgages worth up to $1 million (or $500,000 each for married couples filing separately). 

However, the interest paid out on home equity loans isn’t necessarily included in the deduction. Prior to the Tax Cuts and Jobs Act, the interest on any home equity loan up to $100,000 could be deducted from taxable income, regardless of how the loan was used. Now, it all depends on how you spend the money; if it’s used to make improvements on your property it counts as a qualified residence loan and the interest is still deductible, but if you used the money for something else, such as to cover a personal loan or similar expenses, the interest can’t be included in your tax deduction calculations. 

The other exception is in the case of “grandfathered debt” on mortgages taken out before October 13, 1987, where all interest paid is deductible. 

Is mortgage interest deductible on a second home?

This depends on what you’re using the home for. If the second home is a rental and you haven’t stayed in the property yourself, you won’t be able to claim mortgage interest deduction, and there will be other tax implications to consider. However, if you stay in the property for at least 14 days or 10% of the days it’s rented out for (whichever is longer), it qualifies, and if you’re not renting it out you can deduct mortgage interest regardless. Remember that the mortgage interest deductible limit applies to the amount of interest paid on both the first and second home combined. 

Is mortgage interest tax deductible?

(Image credit: Getty)

How can I claim a mortgage interest deduction?

Whether you file your tax return online or use a professional service, it’s important to know how you can actually claim mortgage interest deduction – and it’s all to do with itemizing. Rather than taking the standard deduction, you’ll need to itemize your mortgage interest by filing Schedule A (Form 1040), which is also the form you can use to list other deductions. You’ll need Form 1098 from your lender (which details how much mortgage interest you’ve paid over the last year) to fill it in. 

However, if you make money from the property (such as by renting it out for part of the year or using it for business purposes) you’ll need to fill in additional forms. Remember, too, that you can’t deduct your entire monthly mortgage payment from your income, only the interest portion of the payment qualifies. Mortgage interest is calculated in such a way that sees more of your monthly payment go towards interest in the earlier years of your loan, which makes the mortgage interest deduction more valuable. 

Is it worth claiming the mortgage interest deduction?

The mortgage interest deductible limit means that the majority of homeowners will be able to qualify for the deduction, but whether or not it’s worth claiming largely depends on their individual circumstances, and whether they’d be better off taking the standard deduction. 

The standard deduction for this tax year is $12,400 for single filers and $24,800 for married couples filing together. If the amount you spend on mortgage interest and other deductions (including charitable donations, student loan interest, medical expenses, mortgage points, etc) exceeds these levels, it makes sense to itemize and claim, as you’d be able to reduce your taxable income by a larger amount. If, on the other hand, your allowable deductions total less than the standard deduction, you’ll be able to save more on your taxes by taking the standard deduction. 

It’s generally expected that the larger the mortgage and the higher your tax bracket, the more you’ll be able to benefit by itemizing and claiming mortgage interest deduction. Though if you’re paying a tax expert to file your return, make sure to factor in the additional cost of itemizing to ensure it’s still worthwhile.

Leanne Macardle

Leanne has been writing professionally for well over a decade, with the majority of that time spent at a financial publishing company where she wrote countless articles across the personal finance space. Now freelancing, she still predominantly writes about finance, with bylines in both national and trade publications. In her spare time Leanne likes to read, catch up on Netflix and sleep, though her toddler rarely allows such things.