Deducting mortgage interest while filing taxes
Deducting mortgage interest while filing taxes
While filing our taxes we can claim some deductibles. Deductible is an amount by which you reduce your taxable income. For example, if your taxable income is $50,000 and you deduct an amount of $5000 then you owe taxes on $45,000.
Mortgage interest is one such deductible which can help you reduce your taxable income. Mortgage interest is the interest paid to the lender every year when you take a loan towards your home purchase.
Let's say you made a home purchase of $300,000 and did a downpayment of $60,000. Therefore, you took a loan on the remaining amount of $240k at some mortgage rate (let's say 5% for 30 years). Now every month, you will pay two components to the lender: principal and interest. In this case your monthly payment will amount to approximately $1300 out of which $300 will go towards the principal and remaining $1000 towards the interest. In the first 12 months you would have paid $12,000 in interest. This is the interest amount which you can deduct from your taxable income as mortgage interest deduction. However, there are certain rules to deduct mortgage interest amount.
Rules:
Mortgage Interest paid towards the first or second home can be deducted. You cannot deduct mortgage interest you pay on a rental property you own.
Mortgage interest includes: Mortgage for first home, second home, line of credit and home debt equity
If you borrow the money then you sign a contract & the deductible will be on your tax return. If you co-sign the documents with your spouse or parent then the amount could be deducted from co-signers of the tax return.
There is a limit on the amount that one can deduct towards Mortgage Interest. As per 2017 Tax law, this limit is set to $750,000. Therefore, if you take a loan upto $750,000, then you can deduct the entire mortgage interest paid every year. If your loan amount is over this limit, then you'd be able to deduct a portion of the mortgage interest paid every year.
If you were renting the home before buying it; then the rent paid on it before the purchase is not eligible for deduction.
This deduction has to be claimed as an itemized deduction. In 2017 Tax Law, the standard deduction limit has been increased to $24,000 for married filing jointly and $18,000 for head of households. Therefore in order to take Mortgage Interest deduction, your itemized deductions should be greater than standard deduction.
Some of you will be eligible to deduct property taxes as well, if you are not subject to AMT (Alternative Minimum Tax). The limit on Property Tax Deduction is set to $10,000.
Refinancing:
If you refinance your home; then the excess over the old mortgage balance is treated as home equity debt.
Interest on an amount upto $100,000 on excess over the old mortgage balance is deductible.
Documentation:
You need the following documentation if you are claiming mortgage interest deduction while filing your taxes:
Copy of Form 1098 (Mortgage interest statement): This will be provided to you by your lender at the end of the tax year which will outline total Mortgage Interest paid by you in that year.
This form will also include any mortgage points you paid upfront. Mortgage points are also tax deductible.
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