Tax season started late this year to give the IRS more time to prepare its systems after the COVID-19 relief act went into effect in December.
For homeowners, that means even less time to answer the annual question: Does your mortgage get you a tax break or other deduction? It’s not a simple yes-or-no answer, says Mark Steber, chief tax officer at Jackson Hewitt Tax Service.
To see if you qualify for the mortgage interest tax deduction or to help you decide if you should itemize, it’s always a good idea to talk to a tax professional.
In this Article
- What Is the Mortgage Interest Deduction?
- Should You Do a Standardized or Itemized Deduction?
- How to Claim the Mortgage Interest Tax Deduction
- What Qualifies for This Deduction in 2020?
- What’s Not Deductible In 2020
The mortgage interest tax deduction can be a great benefit for some. But, just because you have a mortgage doesn’t mean it makes sense to use the deduction. Here are a few things you need to know about qualifying for and claiming the mortgage interest tax deduction:
What Is the Mortgage Interest Deduction?
To understand the mortgage interest deduction claimed by some filers, it helps to better understand your mortgage payments, which consist of two parts:
- The principal, which is the amount you borrowed
- The interest, which is a percentage of that amount that’s the cost of borrowing that money
When we talk about deducting mortgage interest, we are referring to whether homeowners can deduct the total interest they’ve paid for the tax year, effectively reducing the total income their tax bill is based on.
“That means it can be subtracted from your total taxable income, reducing the amount of federal taxes you owe each year,” says Megan Bellingham, head of operations at digital mortgage lender Better.com. “If you qualify for mortgage-related tax deductions, it will only make sense to claim them.”
Whether you qualify, though, depends on your loan amount and how you file your taxes.
Should You Do a Standardized or Itemized Deduction?
To be able to deduct mortgage interest on your taxes, you’ll need to itemize your deductions on your tax return. That means the total of your mortgage interest and other things, like private mortgage insurance (PMI), state and local taxes, and charitable donations would need to be more than the standard deduction.
But thanks to the 2017 Tax Cuts and Jobs Act, itemizing makes less sense for a greater number of Americans. That’s because the law boosted the standard deduction amount, increasing the number of people it makes sense for.
It also lowered the threshold for what mortgages allow a mortgage interest tax deduction. For mortgages that originated before Dec. 16, 2017, you can deduct interest on loans of up to $1 million. For loans that originated after that, you can deduct interest on loans up to $750,000.
For the 2020 tax year, the standard deduction is:
- • $12,400 single filing
- • $24,800 married, filing jointly
- • $12,400 for married, filing separately
- • $18,650 for head of households
“The standard deduction used to be about one-half of what it is right now, so it used to be easier to deduct your mortgage interest,” says Eric Bronnenkant, CPA, CFP, and head of tax at Betterment, a financial planning agency. “The doubling of the standard deduction as part of the 2017 tax reform and the further limiting of the mortgage interest loan balance has made it harder for people to benefit from the mortgage interest that they pay.”
So itemizing only makes sense if your total mortgage interest, taxes, charitable donations, and other tax-deductible expenses add up to more than the standard deduction amount you qualify for, Steber says.
Since mortgage interest rates were so low this year, people, in general, paid less in interest, so it could be better to skip the mortgage interest deduction and take the standard, explains Steber. “Less taxpayers will itemize than they did before that law,” says Steber.
How to Claim the Mortgage Interest Tax Deduction
If you work with a tax pro to file your taxes, they can help determine this based on your individual circumstances. If you file on your own and have determined it makes sense for you, here’s what you’ll need to do to claim the mortgage interest tax deduction:
- Collect Form 1098 from your lender. Typically arriving to you in January, this form will contain the amount of the loan and the interest you paid.
- Determine if you can itemize your deductions. If you choose itemized deduction, you can select deductions such as mortgage interest, student loan interest, medical expenses, etc. Add up the total interest on Form 1098, along with other items like state and local income tax, mortgage insurance, and charitable donations. If this total exceeds the standard deduction, then you may see a better return with the itemized path.
- To itemize, complete the Schedule A with your tax return. This form is where you list out all of your itemized tax deductions.
- Keep records for at least seven years. Even if you can’t itemize, hang on to your Form 1098 and other documentation supporting potential deductions for at least seven years in case of an audit, Steber says.
What Qualifies for This Deduction in 2020?
Deductible mortgage interest is interest paid toward a secured loan on a “qualified home” for a primary or secondary residence.
Your mortgage is the secured loan in this case, which means in the event of a defaulted loan, the lender can take possession of your home.
The IRS defines a qualified home as:
- Primary residence: A residence where you live the majority of the time.
- Secondary residence: A second residence. As long as it’s not a property you rent out. However, there are exceptions.
- The primary or secondary home can be a house, condo, mobile home, boat, or house trailer.
- The primary or secondary home must have sleeping, cooking, and toilet facilities.
- The primary or secondary home can be under construction.
Other types of payments count as mortgage interest, too, including:
- Mortgage points you’ve paid. “Points,” sometimes referred to as loan origination fees or loan discounts, are prepaid interest.
- Interest on a home equity loan or home equity line of credit (HELOC), as long as the loan was used to “buy, build, or substantially improve” the property. If you used the funds to go on vacation or pay off credit card debt, the interest isn’t deductible.
- Late mortgage payment charges
- Mortgage prepayment penalties. Sometimes homeowners are penalized for paying off a mortgage early. The penalty can be taken as a mortgage interest deduction.
- When you sell your home, you can deduct the mortgage paid up to the date of the sale.
- Mortgage insurance premiums issued by the Department of Veterans Affairs, the Federal Housing Administration, or Rural Housing Service, or private mortgage insurance (PMI) is deductible for 2020.
- For mortgage insurance contracts issued after 2006.
Mortgage interest may not qualify if your AGI (adjusted gross income) is higher than $100,000 (on Form 1040).
What’s Not Deductible In 2020
Not all mortgage interest is tax-deductible. This is what the IRS says is not tax-deductible:
- Mortgage Debt not secured by collateral.
- Mortgage interest on properties besides the main and secondary home.
- Home equity loans or HELOCs, when you don’t use the funds to buy, build or substantially improve the property.
- Any interest on loans over $750,000 (or $1 million on loans originated prior to Dec. 16, 2017).
- Homeowners insurance.
- Interest accrued on reverse mortgages.