How Mortgage Interest Deduction Works

Mortgage interest deduction means that you can deduct the interest you pay on your mortgage payments from your overall tax liability. This is one of the best things about owning a home, as you won’t be taxed on your interest.

There are a few qualifications required in order to be eligible for mortgage interest tax deductions, though most homeowners will usually qualify. The qualifications are as follows:

1. The mortgage must be secured by your main home, or a second home.
2. The name on the mortgage interest statements must be the name listed on your tax return, or must be the name of your spouse if you are a married couple filing jointly, for example.
3. The property in question needs to be a house, condo, or mobile home that is fitted with a bathroom, and has areas for sleeping and cooking.

If you meet these requirements, then you will receive an IRS Form 1098 from your mortgage lender towards the end of the tax year. This Form 1090 will detail how much you have paid in private mortgage insurance, points, and mortgage interest over the tax year.

You can input your IRS Form 1098 into an electronic (e-filing) or traditional paper tax return, and the total of these amounts will be deductible from your overall tax liability, saving you money on taxes overall. This means that the total amount of interest you have paid over the year (ignoring your regular mortgage payments themselves) is deducted from your tax liability, and is not considered “taxable”.

For example, let’s say that you have a $120,000 mortgage that you are paying back over 30 years. This means that you are paying back roughly $4,000 every year, plus interest. Now let’s say that you have a fixed interest rate of 5% on this mortgage. This means that you pay $200 per year (5% of $4,000) in mortgage interest, coming to an overall payment of around $4,200 for the year. This $200 worth of interest can be deducted from your tax liability from the year, meaning that less of your money is subject to tax. Say you have an income of $20,000 per year that is subject to taxation. This deduction means that $200 is subtracted from this income, leaving you with $19,800 of taxable income every year. A tax deduction is not be confused with a tax credit, which directly subtracts your tax liability dollar-for-dollar.

Though mortgage interest deductions aren’t going to save you tons of money, they are certainly an added benefit to purchasing a home. The government uses mortgage interest deductions so that citizens are not deterred from buying homes due to tax implications, and these deductions can be used to save you some money when it comes to April 18 and you’re forced to hand over tax money. The more deductions and credits you can get – the better!