Mortgage Interest Deduction Vs Standard Deduction
The Tax Cuts and Jobs Act lowered the maximum mortgage interest deduction amount, but increased the standard deduction amounts. Due to these changes, fewer taxpayers may choose to itemize their deductions.
The 2019 standard deduction amounts are:
- Single/married filing separately: $12,200
- Head of household: $18,350
- Married filing jointly: $24,400
We calculated the approximate amount of mortgage debt youd likely need for the interest payments in the first year of your loan to outweigh the standard deduction.
| Filing Status | |
|---|---|
| $24,400 | $680,000 |
Based on first-year interest costs for a 30-year, fixed-rate mortgage at the current national average rate of 3.65%.
The table above shows that if youre single taxpayer, youd need at least $340,000 in mortgage debt to claim the mortgage interest deduction. But even if your mortgage balance isnt quite that high, you may also claim other deductions on your tax return, which could still make itemizing the better choice. For example, you can deduct up to $10,000 in state and local taxes including property taxes. The limit is $5,000 for married couples filing separately, however.
Of course, your particular situation will depend on your mortgage rate, as well as the number of monthly mortgage payments you make before tax season arrives. And because fixed-rate mortgages are amortized into equal monthly payments, with every month that passes you pay fewer dollars toward interest and more toward principal.
How Does Ownership Interest Impact Who Can Claim The Home Mortgage Interest Deduction
So, we covered all the requirements for claiming the mortgage interest deduction except the ownership interest part. Ive found that thats really the piece that trips most people up.
In the following section, Ill cover who is entitled to claim the deduction in those circumstances and give you some interesting real-world questions and answers.
Perhaps you own property with multiple people, are responsible for paying a mortgage even if your name isnt on the mortgage or title, or pay someone elses mortgage for them, for instance.
I gave you an introduction to the mortgage interest tax deduction and told you whats required to claim it.
You learned about the two major hurdles you have to jump over to qualify for it:
Its A Tax Break That Fewer And Fewer Homeowners End Up Taking
Lea Uradu, J.D. is graduate of the University of Maryland School of Law, a Maryland State Registered Tax Preparer, State Certified Notary Public, Certified VITA Tax Preparer, IRS Annual Filing Season Program Participant, Tax Writer, and Founder of L.A.W. Tax Resolution Services. Lea has worked with hundreds of federal individual and expat tax clients.
A Tea Reader: Living Life One Cup at a Time
The home mortgage interest deduction is one of the most cherished American tax breaks. Realtors, homeowners, would-be homeowners, and even tax accountants tout its value. In truth, the myth is often better than reality.
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Can I Claim Mortgage Interest Deduction If My Name Is Not On The Mortgage Or Deed But I Paid All The Payments And Live At The House With My Brother We Are 50/50 Owners
We originally bought the house together and both our names were on the mortgage and deed. However, after refinancing we took my name off the mortgage and deed in case I wanted to buy another home. That never happened. We have always lived at the same house. The last two years I’ve paid the mortgage payments. However, since my name is not on the deed or mortgage can I claim the mortgage interest deduction? We consider ourselves 50/50 owners even though my name isn’t on the deed or mortgage.
Choose The Correct Tax Forms
Youll need to itemize your deductions to claim the mortgage interest deduction. Since mortgage interest is an itemized deduction, youll use Schedule A , which is an itemized tax form, in addition to the standard 1040 form. This form also lists other deductions, including medical and dental expenses, taxes you paid and donations to charity. You can find the mortgage interest deduction part on line 8 of the form. Youll put in the mortgage interest information found on your 1098 in that section. Pretty easy.
Now comes the tricky part. If you make money from the home whether using it as a rental property or using it for your business youll need to fill out a different form. Thats because the way interest is deducted from your taxes depends on how you used the loan money, not on the loan itself.
If you are deducting the interest you pay on rental properties, you must use Schedule E to report it. This form is used for supplemental income from rental real estate. If you use part of your house as a home office or if you use money from your mortgage for business purposes, you may need to fill out a Schedule C to report it. This form is used for profit or loss from a business you owned or operated yourself. Youll list mortgage interest as an expense on both of these forms.
Whatever mortgage interest youre deducting and whatever form youre using, its important to know what qualifies as interest and what isnt deductible. If you are itemizing your deductions, read on.
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Why Is Mortgage Interest Not Tax Deductible In Canada
In 2009, a case was brought before the Supreme Court of Canada, wherein two homeowners deducted over $100,000 in interest expenses on their mortgage loan between 1994 and 1996. Unfortunately, upon examination, the Minister of National Revenue cited the deductions as abusive tax avoidance, and had them declared invalid. After the homeowners took legal actions, the Supreme Court sided with the Canadian Government, officially proclaiming that tax deductions could not be made on mortgage interest payments, unless the home is generating an income because you are renting it out.
Understanding The Mortgage Interest Deduction
See Mortgage Rate Quotes for Your Home
One of the main mortgage tax benefits of homeownership is the mortgage interest deduction. When you deduct the interest paid on your mortgage, you reduce your taxable income by that amount. Heres what to know about the deduction, its limitations and how it may affect you at tax time.
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Rules Forms & Guidelines From The Irs On Mortgage Interest Tax Deduction
The term points is used to describe certain charges paid to obtain a home mortgage. Points may also be called loan origination fees, maximum loan charges, loan discount, or discount points. Points are prepaid interest and may be deductible as home mortgage interest, if you itemize deductions on Schedule A , Itemized Deductions. If you can deduct all of the interest on your mortgage, you may be able to deduct all of the points paid on the mortgage.
Part I contains general information on home mortgage interest, including points and mortgage insurance premiums. It also explains how to report deductible interest on your tax return. Part II explains how your deduction for home mortgage interest may be limited. It contains Table 1, which is a worksheet you can use to figure the limit on your deduction.
Limits on home mortgage interest. Your deduction for home mortgage interest is subject to a number of limits. If one or more of the following limits applies, see Pub. 936 to figure your deduction. Also see Pub. 936 if you later refinance your mortgage or buy a second home.
Points You’ve Paid On Your Mortgage
Points paid on acquisition debt for primary and secondary homes are fully deductible for the tax year in which they were paid, if you itemize your deductions. They aren’t always reported on Form 1098, but you should be able to find them on your mortgage settlement statement. You can also ask your mortgage lender.
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What Counts As Rental Income
The first step in reducing your rental income for tax purposes is understanding exactly what rental income is. The Internal Revenue Service defines it as any payments you receive in exchange for the occupation of a property that you own.
This includes monthly lease payments as well as security deposits that you don’t return to the tenant. Perhaps your lease allows you to deduct the cost of certain repairs from the security deposit if a tenant damages the property. The amount you keep from the security deposit becomes rental income in the year you deduct it from the deposit.
The same applies if the security deposit represents the first or last month’s rent. This is reportable income. By the same token, if you accept a security deposit and it sits untouched in a trust account during the entirety of the rental term, this isn’t income, nor is any interest the deposit generates. The interest belongs to the tenant.
Try A Tax Prep Service
If you are still having problems understanding exactly how to take the mortgage interest deduction you might want to consult professional help. These top tax filing services will make sure you get your full deduction.
Tax Slayer With a long history and easy to use questionnaire, Tax Slayer can help you take advantage of all the deduction available to you.
TurboTax Theyve been mentioned more time when it comes to taxes than any other platform. TurboTax has a clean interface and makes it very easy to get the most from your deductions.
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How To Claim The Mortgage Interest Deduction
Youll need to take the following steps.
1. Look in your mailbox for Form 1098. Your mortgage lender sends you a Form 1098 in January or early February. It details how much you paid in mortgage interest and points during the tax year. Your lender sends a copy of that 1098 to the IRS, which will try to match it up to what you report on your tax return.
You will get a 1098 if you paid $600 or more of mortgage interest during the year to the lender. You may also be able to get year-to-date mortgage interest information from your lenders monthly bank statements.
2. Keep good records. The good news is that you may be able to deduct mortgage interest in the situations below under certain circumstances:
- You were a co-op apartment owner.
- You rented out part of your home.
- The home was a timeshare.
- Part of the house was under construction during the year.
- You used part of the mortgage proceeds to pay down debt, invest in a business or do something unrelated to buying a house.
- Your home was destroyed during the year.
- You were divorced or separated and you or your ex has to pay the mortgage on a home you both own .
- You and someone who is not your spouse were liable for and paid mortgage interest on your house
The bad news is that the rules get more complex. Check IRS Publication 936 for the details, or consult a qualified tax pro. Be sure to keep records of the square footage involved, as well as what income and expenses are attributable to certain parts of the house.
Example Shared Home Ownership With A Family Member
Lets say you own a second home at the beach with your brother. The agreement you made and put in writing was that if your brother got the mortgage, youd be responsible for some of the minor handy work and youd each pay 50% of the mortgage.
Both your names are on the title of the property but your brother is the only one listed on the mortgageso hell be the only one who receives Form 1098. But since he paid half of the mortgage payments, hes only entitled to 50% of the mortgage interest deduction and youre entitled to the remaining 50%.
Ideally, you should get a copy of Form 1098 from your brother to submit with your tax return. You should also:
- write a note explaining that youre an owner of the property even though your name isnt on the mortgage
- include your brothers name and address as the person who did receive Form 1098
- show how much of the mortgage interest each of you paid
So, it doesnt matter who receives Form 1098if you own a qualified home with someone else and you paid mortgage interest , you can claim your share of the money-saving mortgage interest tax deduction.
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Is Mortgage Interest Still Tax Deductible
The mortgage interest deduction allows you to reduce your taxable income by the amount of money youve paid in mortgage interest during the year. As noted, in general you can deduct the mortgage interest you paid during the tax year on the first $1 million of your mortgage debt for your primary home or a second home.
How To Claim Your Deduction
Eligible homeowners can claim the mortgage interest tax deduction on Schedule A of their annual tax returns. Schedule A accompanies Form 1040 or 1040-SR .
To find out how much mortgage interest you paid during the year, look at your mortgage interest statement, IRS Form 1098. Your lender will send one copy of this form to you and one copy to the IRS. Youll receive it in January or February each year.
IRS Publication 936, updated annually, contains all the information most taxpayers will need to determine their eligibility for the mortgage interest tax deduction. Taxpayers with complex situations may need to ask a Certified Public Accountant for help.
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What If You Own A Home But Are Not On The Mortgage Or Title
Another issue that comes up is whether or not you can claim the mortgage interest deduction when youre not on the mortgage or on the title to a property. Heres a question that I received:
My fiancé bought a home last year but Im not on the title since my credit was not up to par. My fiancé does not work and I pay the mortgage. My question is if theres any way I can benefit from this on my taxes or is it a complete loss for me?
In order to claim the mortgage interest deduction, you must have an ownership interest in the qualified property and be responsible for the secured debt. Youre not allowed to claim the mortgage interest deduction for someone elses debt.
So the answer to the question depends on whether the fiancé considers you an equitable owner or a renter. Without being on the title of the property or having a written agreement that youre an owner who is indebted for the mortgage, you cannot claim the mortgage interest deduction.
Deductions For Home Equity Loan Interest After 2018
The most notable change is that Americans can no longer deduct interest on home equity debt up to $100,000. Many Americans panicked and believed they couldnt deduct any home equity loan interest, but this couldnt be further from the truth.
Whether you can deduct or not depends on what you used your home equity loan for. If you used it to improve your home, you could still deduct the interest. However, you cant deduct the interest if you used the loan to cover other personal expenses.
The reason why is because if you still used the home equity loan to improve your home, it technically counts as a qualified residence loan under IRS guidelines. Technically, this deduction doesnt exist, but you can still take advantage of it because it still qualifies under qualified residence loan standards.
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Mortgage Interest Deduction Is Ripe For Reform
Conversion to Tax Credit Could Raise Revenue and Make Subsidy More Effective and Fairer
Costing at least $70 billion a year, the mortgage interest deduction is one of the largest federal tax expenditures, but it appears to do little to achieve the goal of expanding homeownership. The main reason is that the bulk of its benefits go to higher-income households who generally could afford a home without assistance: in 2012, 77 percent of the benefits went to homeowners with incomes above $100,000. Meanwhile, close to half of homeowners with mortgages most of them middle- and lower-income families receive no benefit from the deduction. Three major bipartisan panels have proposed to convert the deduction to a credit and lower the maximum amount of interest it covers. These reforms would be major improvements over current law and would generate significant additional revenue.
The 1031 Tax Deferred Exchange
You owe the current rate of capital gains taxes for the year of the sale when you sell stock shares at a profit. It’s the same for most other investment assets as well, but not for real estate investments.
The rules are complicated, so you’ll most likely need an accountant or a 1031 Exchange company to apply the exact details to your personal situation. But if you roll all the profit of the sale of a rental property into another property within a specific time frame and according to certain guidelines, you may not have to pay capital gains on that profit. You can pass your gains forward until the time of a final sale.
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