What is the Mortgage Interest Deduction?
The mortgage interest deduction, as the name suggests, is a specific type of tax incentive aimed at homeowners. It’s an itemized deduction that allows you to deduct any interest that you’re paying on a loan that was specifically related to building, purchasing or improving your primary residence.
Once claimed, the mortgage interest deduction can lower your taxable income – thus reducing the amount of taxes that you owe as well.
While mostly designed for interest related to your primary home, it is possible to take the mortgage interest deduction for interest paid on loans concerning a secondary residence – provided that you stay within the limits.
What is the Mortgage Interest Deduction Limit?
The mortgage income deduction changed significantly with the passage of the Tax Cuts and Jobs Act, otherwise known as the TCJA, in 2017. At that time, the mortgage deduction limit was actually lowered and there is now also a restriction on what you can deduct from your collective home equity loan debt.
Prior to 2017, the mortgage interest deduction was limited to $1 million. After the Tax Cuts and Jobs Act, however, that limit was lowered to $750,000. If you’re a single filer or if you’re a married couple filing jointly, you can deduct the interest on a loan up to that $750,000. If you’re a married couple filing separately, you can deduct up to $375,000 each.
Of course, there are a few exceptions to these limits that may apply to your situation. These include ones like:
- If your mortgage began prior to October 13, 1987, you’re essentially grandfathered into the old rules prior to the Tax Cuts and Jobs Act. 100% of the interest that you pay is fully tax-deductible.
- If you purchased your home after October 13, 1987 but before December 16, 2017, you still get to enjoy that $1 million limit that was previously in place. Note that if you’re married filing separately, this means that each spouse gets to deduct up to $500,000.
- If your home was sold prior to April 1, 2018 but there was a binding contract in place prior to December 15, 2017 (and you closed before January 1, 2018), you are also still able to take advantage of the $1 million limit.
What Loans Qualify For This Deduction?
There are a few different types of loans that allow you to take advantage of the mortgage interest deduction that you should be aware of moving forward. These include any home loan that you took out to buy, build or improve upon your primary place of residence.
As stated, a second mortgage may also qualify – as may a home equity loan or a line of credit. It’s still required that the money went to buying, building or improving your home, however.
How To Claim The Mortgage Interest Deduction On Your 2020 Tax Return
Note that in order to take the mortgage interest deduction on your 2020 tax return, you will have to choose the itemized deduction method. This also allows you to choose from a wide variety of different deductions that may apply to you like those related to charitable contributions, medical expenses, interest paid on student loans that you still have and more.
If you plan on itemizing your deductions, you need to provide records, receipts and other documents that prove you paid as much interest on your mortgage in the previous year as you say you have. You will need to get a Form 1098 from your mortgage lender, for example.
Or, you could choose to take the standard deduction – something that is available to everyone by way of a flat dollar amount with no additional paperwork required. For the 2020 tax year, the standard deduction is $12,400 for all single filers and $24,800 for those who are married and filing jointly. If you are married but filing separately, the standard deduction is $12,400. If you are the head of your household, the standard deduction is $18,650.
Whether you should itemize your deductions to take advantage of the mortgage interest deduction (among others) or take the standard deduction ultimately comes down to which method saves you the largest amount of money. That’s why it’s always recommended that you make both sets of calculations so that you can better understand which one will have a larger positive impact on your life.