Hi, I’m Bette Hochberger, CPA, CGMA, and for today’s quickie, I’ll discuss what mortgage interest is, how the deduction works, and what you need to know to take advantage of this benefit. When you buy a home, one of the biggest expenses you’ll face is your mortgage. If you’re a homeowner, you might be pleased to learn that you can potentially save money on your taxes through mortgage interest deductions. Let’s dive in!
What is Mortgage Interest?
Mortgage interest is the cost you pay to borrow money from a lender to buy your home. When you take out a mortgage, you typically agree to repay the loan amount plus interest over a set period, such as 15 or 30 years. The interest is calculated based on the loan amount and your interest rate, and it is usually a significant part of your monthly mortgage payment, especially in the early years of the loan.
How Does the Mortgage Interest Deduction Work?
The mortgage interest deduction allows homeowners to deduct the interest paid on their mortgage from their taxable income. This means that if you qualify, you can lower the amount of income that is subject to taxation, potentially reducing your overall tax bill.
For the tax year 2024, you can deduct interest on mortgages up to $750,000 for loans taken out after December 15, 2017. For mortgages taken out before this date, the limit remains at $1 million. This deduction applies to primary residences and, in some cases, second homes.
Who Can Benefit from the Deduction?
Not every homeowner will benefit from the mortgage interest deduction. Here are a few key points to consider:
Itemizing Deductions
To take advantage of this deduction, you must itemize your deductions on your tax return instead of taking the standard deduction. For many homeowners, especially those with higher mortgage payments, itemizing can lead to greater tax savings.
Interest Amount
The amount of mortgage interest you can deduct depends on your specific mortgage terms and how much interest you have paid throughout the year. Homeowners with larger mortgages or higher interest rates will typically benefit more from this deduction.
Filing Status
Your filing status can also impact your eligibility for the deduction. For example, if you’re married and filing jointly, your combined income and deductions can affect the overall tax benefit.
How to Claim the Deduction
To claim the mortgage interest deduction, you need to keep track of the interest you pay throughout the year. Your lender will provide you with a Form 1098, which shows the amount of mortgage interest you paid during the tax year. Here’s how to proceed:
1. Receive Form 1098: At the beginning of each year, your lender sends you this form, which details the total interest paid.
2. Complete Schedule A: When filing your taxes, you’ll need to fill out Schedule A of your Form 1040, where you can list your itemized deductions, including mortgage interest.
3. Keep Records: Maintain good records of your mortgage payments and any other relevant documents in case you need to verify your deductions.
This deduction can be a valuable tax benefit for homeowners, potentially saving you money at tax time. By understanding how it works and ensuring you meet the eligibility requirements, you can effectively utilize this deduction to lower your taxable income. If you’re unsure about your specific situation or need assistance, feel free to schedule a meeting with us, we can provide personalized guidance based on your circumstances. Remember, being informed about deductions like this can make a significant difference in your overall financial health as a homeowner!
As always, stay safe, and I’ll see you next time!
