Are you a homeowner looking to maximize your tax savings? One potential avenue for deductions is mortgage interest payments. But, can you actually claim mortgage interest on your taxes? Here’s what you need to know.
What is Mortgage Interest?
Mortgage interest refers to the amount of money paid on a home loan as a result of borrowing funds from a lender. This interest is included in monthly mortgage payments and can sometimes be tax-deductible.
Types of Mortgages That Qualify
In order to qualify for a deduction, the mortgage must meet certain criteria set forth by the IRS. The following types of mortgages typically qualify:
- Primary residence loans
- Second-home loans
- Home equity lines of credit (HELOCs)
- Refinanced mortgages
It’s important to note that not all expenses associated with these loans are deductible – only the total amount due towards paying off the loan’s principal may be eligible for deductions.
How much can you deduct?
The amount that taxpayers can deduct varies depending on several factors including whether their loan was taken before or after December 15th, 2017 among other things.
For those whose mortgages were taken out prior to 2018, they may still be able to write off any interest paid up until $1 million debt limit incurred when purchasing or constructing their primary residence.
The new tax law decreased this cap considerably and applied it retroactively even if one had already purchased or constructed their house based on previously allowable limits. Under current regulations third-party lenders could also receive forgiveness via modified terms initiated by either an intervening legal action or bankruptcy procedure provision related relief measures authorized under certain programs such as HAMP (Home Affordable Modification Program).
However if someone refinances they would start fresh – breaking open a new cap which will help them write off less over time since no grandfather clause exists for these cases anymore given recent changes to the tax code.
What About Home Equity Loans?
Home equity loans, or ‘second mortgages’, must also meet several qualifications in order to qualify for any deductions. These include:
- The loan is secured by your home
- You use the loan proceeds to improve your home
- The combined amount of all outstanding mortgages on the home is less than $750,000 ($375,000 for married taxpayers filing separately)
If these criteria are met, homeowners can deduct interest on up to $100,000 of debt that was secured by their primary residence or second-home in which they have an ownership stake.
Conclusion
Mortgage interest deductions can be a valuable way to reduce your tax bill when you own a home. However, it’s important to consult with a tax professional and ensure that you’re following all of the IRS guidelines related to mortgage interest deductions. Taking time upfront to understand what qualifies as deductible will help ensure maximum savings down the line while minimizing audit risks.
FAQs
Here are 3 popular FAQs related to claiming mortgage interest for tax savings, along with their answers:
Q1. Can I claim the full amount of my mortgage interest as a tax deduction?
A1. No, you cannot claim the full amount of your mortgage interest as a tax deduction. The IRS has placed limits on the amount of mortgage interest that can be claimed each year based on certain criteria such as type of loan, use of funds and income levels.
Q2. Is there a limit to how much mortgage interest I can deduct from my taxes?
A2. Yes, there is a limit to how much you can deduct for home mortgage interest on your taxes. For mortgages taken out after December 15th, 2017, taxpayers may only deduct up to $750,000 in qualified residence loans.
Q3. Can I still claim my mortgage interest if I take the standard deduction?
A3: No not necessarily.The standard deduction significantly increased starting in 2018 which means many taxpayers may choose this option over itemizing deductions like home mortgage interests.Experts suggest that should calculate whether itemizing or taking the new higher standard is more beneficial by estimating deductions and comparing it with the standard one provided by IRS each year
