Whether you currently own your home or are thinking of purchasing one, it's important to understand how the mortgage interest deduction works, how much it might save you, and whether you could be eligible for it. Here's what you need to know.
What is the mortgage interest deduction?
The mortgage interest deduction is a tax benefit that allows taxpayers to claim a deduction on their income tax for the mortgage interest they pay.
A tax deduction reduces your taxable income. For example, if you had $50,000 in taxable income and were eligible for a $2,000 deduction, your taxable income would decrease to $48,000. Instead of paying taxes to the IRS on $50,000 in income, you would pay taxes on $48,000 in income.
The mortgage interest deduction does not allow you to claim an unlimited amount of mortgage interest. In the past, homeowners were allowed to deduct interest on up to $1 million of mortgage debt. However, the Tax Cuts and Jobs Act (TCJA) reformed the tax code and imposed a new cap.
Now, homeowners who are single filers or married filing jointly are allowed to deduct mortgage interest on a mortgage of up to $750,000. Married taxpayers filing separately can deduct interest on a mortgage of up to $375,000 each.
Taxpayers must itemize, or individually list, their deductions to claim the mortgage interest deduction on their federal income taxes. Taxpayers can choose between itemizing and claiming the standard deduction. The tax reform act substantially increased the standard deduction, so there are many more taxpayers who now claim the standard deduction rather than itemize. That means fewer people actually end up deducting mortgage interest and taking that tax break.
Although 44% of homeowners claimed the mortgage interest deduction before the act, only around 15% of Americans with homes will find it makes financial sense to do so after the passage of the act, according to the USC Gould Business Law Digest.
Mortgage interest tax deduction 2023: What to know
Here's what taxpayers need to know about how the mortgage tax deduction works.
What is deductible?
Under the IRS rules for the home mortgage interest deduction, taxpayers can deduct:
- Mortgage interest on up to $750,000 in mortgage debt or on up to $1 million in mortgage debt if you took out the loan prior to Dec. 16, 2017
- Mortgage points
- Late mortgage payment charges
To deduct mortgage interest, the home must be your main home or a second home. And although you are allowed to deduct interest on second homes, if you have more than one home in addition to your primary residence, you must choose one to serve as your second home for the mortgage interest deduction.
If you rent out part of your home or your second home, there are further restrictions on when you can claim the deduction. For example, you must use the second home for at least 14 days per year or for more than 10% of the number of days each year the home is rented to someone else. And if you're using part of your primary home as a rental property, the rented part cannot be a self-contained residential unit.
For IRS purposes, a home is defined as a house, condo, cooperative, mobile home, boat, home trailer, or similar property with sleeping, cooking, and bathroom facilities.
What isn't deductible?
You are not allowed to deduct mortgage interest on a home equity loan or line of credit (HELOC) unless the money you borrowed with these loans was used to “substantially improve” the home, according to the IRS. This could be building an addition, putting in new windows and solar panels to be more energy efficient, or other significant improvements to your home.
You can’t deduct mortgage interest on these loans if you use the funds for another purpose, such as paying for higher education expenses or credit card debt.
If you do a cash-out refinance, you can’t deduct the interest on the cash you took out unless you use it to substantially improve a home or buy or build a qualified home. If you refinance for a better interest rate or loan term without taking out cash, you can take the mortgage interest deduction as long as the refinancing was done on a qualified home.
How does the mortgage interest deduction impact your taxes?
When you learn how to file taxes, one of the first things you realize is that there are different tax brackets. The mortgage interest deduction, along with your other itemized deductions, can affect which tax bracket you fall into.
Let’s say you’re a single filer and your adjusted gross income for the 2022 tax year was $90,000. You paid $1,500 in mortgage interest and you itemized other deductions as well, which comes to a total of $13,000 in itemized deductions. This is higher than the $12,950 standard deduction for single filers in 2022, so you decide to itemize your deductions on your tax return.
That brings your taxable income from $90,000 to $77,000. At $90,000, some of your income would have been taxed at 24%, as the 24% tax bracket started at $89,076. With the itemized deductions, your taxable income is $77,000, which falls into the 22% tax bracket.
You can only claim the mortgage interest deduction if you itemize, and you must choose between itemizing and claiming the standard deduction. For the 2022 tax year (filed in 2023), the standard deduction is:
- $12,950 for single filers
- $25,900 for married couples filing jointly
- $19,400 for heads-of-household
For the 2023 tax year (filed in 2024), the standard deduction is:
- $13,850 for single filers
- $27,700 for married couples filing jointly
- $20,800 for heads-of-household
In order for itemizing to make sense, the specific itemized deductions you have would need to add up to more than the standard deduction for your filing status. Otherwise, claiming the standard deduction would save you more on taxes.
Say, for example, you are a single filer with $2,000 in mortgage interest to claim, if you itemized, and no other itemized deductions such as property taxes or charitable contributions. You would have to choose between reducing your taxable income by $2,000 if you itemized and claimed the mortgage interest deduction or taking the $12,950 standard deduction.
Obviously, in this case, it would be better to claim the standard deduction and reduce your taxable income by $12,950 than by $2,000.
Keep in mind that itemized deductions and the standard deduction lower your taxable income. This is different from income tax credits, which reduce the amount you owe the IRS dollar for dollar. A deduction of $2,000 will lower your taxable income by $2,000, which will lower your tax bill, but not by $2,000. A tax credit of $2,000 will lower your tax bill by $2,000.
How to claim the mortgage interest deduction
If you plan to claim the mortgage interest deduction, as mentioned above, you will need to itemize rather than claim the standard deduction.
If claiming the mortgage interest tax deduction makes sense for you, here are the steps to take:
- Look for your Form 1098 Mortgage Interest Statement, which is a form your lender provides detailing the amount of interest you were charged for the year.
- Submit a Schedule A tax form with your tax return detailing your itemized deductions, including the mortgage interest deduction. List your mortgage interest, points, and mortgage insurance premiums in lines 8A, 8B, 8C, and 8D.
- Specify the amount of itemized deductions you are claiming on Line 12 of your 1040 tax form.
Is mortgage interest deductible?
Mortgage interest is deductible on loans up to $750,000 for primary and/or second homes. The home must be a qualifying property, including a house, condo, mobile home, boat, or trailer with cooking and sleeping facilities. You must itemize on your tax forms, rather than claiming the standard deduction, if you wish to claim the mortgage interest deduction.
How much mortgage interest can you deduct?
If you took out a mortgage loan prior to December 16, 2017, you can deduct mortgage interest on up to $1 million in mortgage loan debt. If you borrowed after this date, the mortgage deduction limit is mortgage interest on up to $750,000 in mortgage debt.
Can you deduct mortgage interest without itemizing?
You can’t deduct mortgage interest without itemizing. You should compare the amount you will save by itemizing versus the amount saved by claiming the standard deduction to decide what approach makes the most sense and will save you the most money when you file your taxes.
Understanding how tax deductions work is one of the keys to figuring out how to manage money effectively. If you are an aspiring homebuyer about to take out a new mortgage, then you might be under the impression that homeownership will save you money on your taxes because you can deduct your mortgage interest payments. Because tax reform laws increased the standard deduction, however, that’s not always the case.
Although the best tax software or a tax professional can help you to understand the deductions you are eligible for, it's still important to know whether specific expenses will be tax deductible for you and whether it makes sense for you to itemize and take advantage of those deductions. Learn more about how to itemize deductions on your taxes and whether it’s right for you.
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