As a homeowner, did you know that you could still possibly qualify for a mortgage interest tax deduction? Many homeowners (currently owning and new buyers), real estate agents, and tax accountants often use this as either a selling point or a justification on owning a home.
Some owners who can tick off the following checklist are the most eligible for this tax benefit:
- The property you own is a house, a co-op, an apartment or condo, mobile home, houseboat, or trailer home
- Your home is a collateral for the loan
- To qualify, your property must have sleeping, cooking, and toilet functionalities
- If you took out a mortgage on your home to buy out your ex-spouse’s half of the home
- You have a nontaxable housing allowance from the ministry or the military
While it does sound like a promising sell, there are things you need to know and understand before you can fully maximize your mortgage interest tax deduction.
It’s Not a Tax Credit
A tax credit is when the amount of taxes you need to pay gets reduced dollar for dollar. For example, say you owe the government $1,000 in income taxes and you get a $100 tax credit, it means that you’ll only have to pay $900 in taxes. Tax credits are given out by the government to reward certain behaviors or attitudes. You could get either refundable, non-refundable, and partially refundable tax credits depending on the behavior they’re promoting.
The mortgage interest tax deductions, on the other hand, are tax benefits homeowners who itemize their federal income tax deductions enjoy. How does it work? Let’s go back to the earlier example. The difference is that instead of getting the full $100 deducted from your income tax, you only get a portion of it credited, and that depends on where in the income tax bracket you qualify for. At the 20% tax bracket? Only 20% of your $100 tax credit will be used, thus, making you owe the government $980.
You Can Deduct Only from the Interest
As the name suggests, this is not a tax deduction on your principal mortgage, but it’s a deduction on the interest instead. Seems simple enough but the 2017 Tax Cuts and Jobs Act made things slightly more complicated. In a nutshell, the act lowered the cap on the principal amount and interest you mortgaged your house for. Prior to the act you could deduct interest from up to $1 million worth of mortgages, but the cap brought it down to $750,000 on mortgages made by and after December 15, 2017.
The good news is that if you refinanced your mortgage by that date, the old rules still apply. However, if you borrowed an amount that is more than your current balance, you might have to adhere to a different set of rules too.
Other Parts of Your Monthly Mortgage Payments You Can Deduct From
While the mortgage interest tax deductions only apply to mortgage interests, it is not the only part of your monthly payment that you can apply deductions to. Some of these include late payment fees, mortgage insurance premiums, and mortgage discount points.
You also have the choice of either deducting the points in the year that you’ll be paying your taxes or over the course of your loan’s life. If you have a home equity loan that you used to make improvements on your home, you could use those points the same way. However, if you took out a mortgage for a second home, you won’t have a choice but to use the points over the loan’s life, and the same goes for any refinancing points you have accrued.