Mortgage Tax Deduction
There are a number of benefits that come from home
ownership. One of which is the mortgage tax deduction,
but there are certain restrictions that should be
considered.
Many home shoppers are excited about the prospect of owning a home, not just because they have a
house to call their own, but also because of the tax benefits often derived from home ownership.

The mortgage tax deduction may be a little overhyped. The mortgage tax deduction isn’t an automatic
deduction. In fact, some homeowners may get little or no tax benefit from paying mortgage interest.

How the Mortgage Tax Deduction Works

The mortgage tax deduction is one of those tax deductions that requires you to itemize to get the benefit.
The IRS automatically lets you take a standard deduction each year based on whether you’re married or
single. If your itemized deductions, including mortgage interest and other deductions, are less than the
standard deduction, it makes more sense to take the standard deduction. In 2011, the standard
deduction for single tax filers is $5,800; $11,600 for joint filers; and $8,500 for head of household filers.

You don’t get to reduce your tax by the full amount of the mortgage interest paid each year. Instead, you’ll
only be able to reduce your income tax by a percentage based on your
tax bracket: $15 for every $100 in
mortgage interest paid if you’re in the 15% tax bracket; $25 for every $100 in mortgage interest paid if
you’re in the 25% tax bracket; and so on. So if you make more money and are in a higher tax bracket,
your mortgage deduction is bigger.

Because most mortgage interest is paid at the beginning
of the loan, you may not get the benefit of the mortgage
tax deduction for long. Each year, you’ll pay less and less
mortgage interest and your other itemized tax deductions
will have to increase if you want to continue to take the
tax deduction.

How to Qualify for the Mortgage Tax Deduction

To take the mortgage tax deduction, you must file your
taxes on Form 1040 and itemize your deductions on
Schedule A. You must be liable for the loan. You’re not
allowed to deduct payments on someone else’s loan if
you’re not legally liable for the payments. The mortgage
must be secured debt for a qualified home, meaning your home could satisfy the debt in case of default
and the mortgage is recorded with your state.

Which Mortgage Costs Are Deductible?

Your mortgage lender will send a Mortgage Interest Statement, Form 1098 to you each year that lists the
amount of mortgage you paid in the year. The number is also reported to the IRS so it’s important that the
numbers on your tax return match what’s on the form. The mortgage lender will also send a statement
including the amount of property taxes you paid in the year. This tax is also deductible on your income tax
return.

There’s a maximum mortgage limit of $1 million on your first or second home and the home must be
secured by a mortgage. You can take a deduction for a home you purchased with cash and later
borrowed a home equity loan.

If your mortgage was originated from 2007 through 2011, you can deduct
private mortgage insurance
payments if your income is less than $109,000 for joint filers and $54,500 for separate filers.

You can deduct the money paid for points paid to reduce your interest rate. Points are deducted in the
year they’re paid.

You can deduct interest paid on second mortgage, a HELOC, or home equity loan (one that wasn’t used
to improve your home) that’s less than $100,000 or $50,000 if you file separately. If the loan is more than
the fair market value of your home, you may not be able to take the interest deduction.
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Mortgage Tax Deduction