The mortgage interest deduction is simply a tax deduction for the interest paid on your mortgage payments; this is applicable for the first $1,000,000 of mortgage debt. Homeowners who bought their house AFTER December 15th, 2017, can deduct the interest paid on the first $750,000 of their mortgage by itemizing it on their tax return. Here is a brief rundown of how this works in the 2022 tax season, and how you can save money on taxes if you pay a mortgage! 

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How Mortgage Interest Deduction Works in 2022 

2022 tax season is among us, and it is important to make sure you can save as much money as possible. Essentially, the mortgage interest deduction allows homeowners to reduce their taxable income by the amount they paid in home interest for the tax year. This requires itemizing on tax returns.  

For example, imagine you have a $600,000 mortgage and paid $20,000 in interest during this tax year. You would be able to deduct the full $20,000 of the mortgage interest on your tax return. However, say you have a $900,000 mortgage and bought the home in 2020, which is after the 2017 cutoff date, and paid $30,000 in interest. In this scenario, you would not be able to deduct all $30,000 of mortgage interest on your tax return. The amount you could deduct would be a little bit lower as only up to $750,000 of mortgage is deductible after 2017. 

Mortgage Interest Deductible Qualifications 

To see the whole rundown on what qualifies as mortgage interest, check out the IRS Publication 936. However, here is a simple breakdown: 

Mortgage for a primary home: 

  • Property must be a house, condo, apartment, co-op, mobile home, house trailer, or houseboat. 
  • Home must be collateral for the loan. 
  • Required to have facilities for sleeping, cooking, and bathroom. 
  • Mortgage to “buy out” partner after a divorce is applicable. 
  • Nontaxable housing allowance from military or ministry mortgage interest is applicable. 

Mortgage for a second home: 

  • House must be collateral for the loan. 
  • If rented out, you must be there more than 10% of the days you rent it out. 

What if I have points I paid on my mortgage? 

Points are a form of prepaid interest on a mortgage loan; therefore, they are deductible. You can choose to deduct points bit by bit over the term of your mortgage. If you want to deduct the points all at once, you must meet these eight requirements: 

  1. Must be for a primary home. 
  1. Paying points must be an established practice in the area of the property. 
  1. Points are not frequently high. 
  1. Points are not for any closing costs. 
  1. Down payment must be higher than the points. 
  1. Points are computed as percentage of loan. 
  1. Points are shown on the settlement statement. 
  1. Cash method of accounting is used on taxes. 

What is 100% not deductible? 

  • Homeowners insurance 
  • Title insurance 
  • Settlement costs 
  • Deposits, down payments, or earnest money that was forfeited 
  • Interest accrued on a reverse mortgage 
  • Extra principal payments made on mortgage 

Three Steps to Claiming The Mortgage Interest Deduction in 2022 

  1. Obtain Form 1098 from mortgage lender. 

Your mortgage lender will send you a Form 1098 in January or February. This form states how much you paid in mortgage interest and points this tax year. A copy of this is also sent to the IRS. Use this form to determine what to report on your tax return. 

  1. Keep detailed records and documentation. 

In your tax return, you will have to prove what you are claiming. There are many situations in which you can claim the deducible, such as an office space or a timeshare. However, this requires more in-depth documentation on restrictions. Throughout the year, it is best to keep a file with all possible mortgage and property related documentation. 

  1. Itemize on tax returns. 

To claim mortgage interest deduction, you will have to itemize instead of taking the standard deduction. If your standard deduction is more than your itemized deduction, you should choose that. However, if your standard deduction is less than your itemized you, will need to take the time to prep and work through taxes. 

The mortgage interest deduction can save you a lot of money on your tax returns depending on your situation. Make sure to work with a professional to check this out. Use this mortgage interest deduction calculator to get an idea of what your deduction may be. If you are looking to buy a home, check out our free homebuying course on everything you need to know about homebuying. Contact us with any inquiries!