What Is a Mortgage Interest Deduction?

The mortgage interest deduction is a common itemized deduction that can reduce homeowners' taxable income by allowing them to deduct the interest paid🧸 on a🔯ny loan used to build, purchase, or make improvements on their residence.

The amount of deductible mortgage interest is reported each year by the mortgage company on Form 1098, which is sent to homeowners. This deduction is a tax benefit offered to homeowners by th🍨e federal government that is intended to make homeownership more affordable. However, taxpayers must itemize deductions to claim the mortgage interest deduction, so in pra❀ctice, it is a government program that primarily benefits wealthy homeowners.

How a Mortgage Interest Deduction Works

Home mortgage interest is reported on 澳洲幸运5官方开奖结果体彩网:Schedule A of the 1040 tax form. The mortgage interest paid on rental properties is also deductible, but this is report𓆉ed on Schedule E. Interest from home equity loans also qualifies as home mortgage interest.

In order to claim home mortgage interest as a deduction on your taxes, you must itemize your deductions. Home mort𒈔gage interest is often the single itemized deduction that a💝llows many taxpayers to itemize; without this deduction, the remaining itemized deductions would not exceed the standard deduction.

The Tax Cuts and Jobs Act (TCJA), which was passed in 2017, changed the mortgage interest deduction. It reduced the maximum mortgage 澳洲幸运5官方开奖结果体彩网:principal eligible for the deductible interest to $750,000 (from $1 million) for new loans (which means homeowners can deduct the interest paid on up to $750,000 in mortgage debt). However, the TCJA also significantly increased standard 澳洲幸运5官方开奖结果体彩网:deductions, ma♎king it unnecessary for many taxpayers to iteꦿmize.

As a result, most homeowners went on to forgo the use of the mortgage interest tax deduction entirely. For the first year following the implementation of the TCJA, an estimated 135.2 million taxpayers were expected to opt for the standard deduction. By comparison, in 2022, 18.5 million were expected to itemize, and, of those, 14.2 million would claim the mortgage interest deduction.

Roughly 75 million mortgages were outstanding in the United States during the summer of 2022, which suggests that the vast majority of homeowners received no benefit from the mortgage interest deduction.

Qualifications for a Full Mortga𒅌ge Intere🦂st Deduction

In 2017, the Tax Cuts and Jobs Act (TCJA) limited how much interest homeowners could deduct from taxes. Instead of single or married filing jointly taxpayers deducting mortgage interest on the first $1 million ($500,000 for married filing separately) of their mortgage, they can now only deduct interest on the first $750,000 ($375,000 for married filing separately taxpayers) of their mortgage.

However, some homeowners can deduct the entirety oꦗf their mortgage interest paid, as☂ long as they meet certain requirements. The amount allowed for the deduction is reliant upon the date of the mortgage, the amount of the mortgage, and how the proceeds of that mortgage are used.

As long as the homeowner’s mortgage matches the following criteria throughout the year, all mortgage interest can be deducted. Legacy debt, meaning mortgages taken out by a date set by the Internal Revenue Service (IRS) qualifies for the deduction.

• Mortgages issued before Oct. 13, 1987: Taxpayers can deduct any mortgage interest.
• Mortgages issued between Oct. 13, 1987, and December 16, 2017: Taxpayers can deduct interest on the first $1 million of their mortgage ($500,000 if married filing separately).
• Homes sold before April 1, 2018: Taxpayers can deduct interest on the first $1 million of their mortgage ($500,000 if married filing separately taxpayers). The sales contract must have been executed by Dec. 15, 2017, with a closing conducted before April 1, 2018.

Examples of the Mortgage Interest Deduction

Under the Tax Cuts and Jobs Act of 2017, the mortgage limits for the mortgage interest deduction decreased. The TCJA also changed or eliminated many other itemized deductions. As a result, many taxpayers are eligible for fewer itemized deductions, making them more likely to forgo the mortgage interest deduction in favor of the standard deduction.

H💟owever, the mortgage interest 🧸deduction can still prove valuable for some taxpayers.

When the Mortgage Interest Deduction Is Be🀅neficial

For example, consider a married couple in the 24% income tax bracket who paid $20,500 in mortgage interest for the previous year. In tax year 2024, they wonder if itemizing deductions would yield a larger tax break than the $29,200 standard deduction. If the total of their iಞtemized deductions exceeds the standard deduction, they will receive a larger tax break.

After totaling their qualified itemized deductions, including the mortgage interest, they arrive at $32,750 that can be deducted. Since this is larger than the standard deduction, the couple will save more on their taxes if💯 they itemize and claim the mortgage interest deduction.

When the Mortgagও🍬e Interest Deduction Is Not Beneficial

A single taxpayer in the same 24% tax bracket also wonders if itemizing taxes would result in a lower tax liability. The taxpayer paid $9,700 in mortgage interest for the previous year and only has $1,500 of deductions that qualify to be itemized for a total of $11,200. The standard deduction for a single taxpayer for 2024 is $14,600.

Because the total itemized deductions are less th𓄧an the standard deduction, it does not benefit the taxpayer to itemize for the tax year. In this case, the homeowner receives no tax benefit for the mortgage interest they paid, and the mortgage interest deduction goes unclaimed.

The Bottom Line

The mortgage interest deduction allows homeowners who itemize deductions on their taxes to reduce their taxable income. Under the Tax Cuts and Jobs Act of 2017, the limits for the mortgage interest deduction decreased from $1 million to $750,000, meaning the deduction can now be claimed on the first $750,000 of the mortgage, rather than the first $1 million. Some homeowners benefit from legacy clau🃏ses that exempt them from the new rules.

However, the Tax Cuts and Jobs Act also significantly raised the standard deduction, reducing the number of taxpayers who itemize their deductions. As a result, the majority of homeowners don't claim the mortgage interest deduction.