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What is the Mortgage Interest Deduction?

As you may already know, there are more perks to having a mortgage than just stability and the ability to accumulate wealth. The IRS also allows homeowners to deduct their mortgage interest, a major incentive in the quest to reduce taxable income.

What is the Mortgage Interest Deduction?

Simply put, the amount of interest that you paid on your mortgage last year is the amount of your mortgage interest deduction. For example, if you took out a $300,000 mortgage three years ago at a fixed 3% interest rate, then you likely paid $8,543.28 in interest in 2018 based on the amortization scale of your mortgage.

Most mortgages have the interest amortized so that you pay more interest in the earlier years of your loan and less toward the end of the loan. Don’t worry, you don’t have to calculate the interest amount you pay each year. Your mortgage company will mail you IRS Form 1098 if you paid $600 or more in interest, so you just have to enter the information on the tax forms.

The deduction will help lower your overall adjusted gross income, or the amount on which you pay taxes. In prior years, you were also able to deduct what you paid in mortgage insurance premiums, but that deduction expired December 31, 2017 and is not available for the 2018 tax year.

How to Qualify for the Mortgage Interest Deduction

Most homeowners qualify for the mortgage interest deduction and can deduct the entire amount of interest they paid. The deduction can only be used on mortgages taken out after December 15, 2017 to buy, build, or substantially improve a qualified residence when the mortgage is valued at $750,000 ($375,000 if married filed separately).

For mortgages taken out prior to that date, the maximum loan amount is $1 million ($500,000 if married filing separately). A qualified residence is a primary residence or second home and does not apply to mortgages for rental properties or for home equity lines of credit. If you have a mortgage that does not qualify and is larger than the limits, then you can deduct the qualifying portion of interest paid. The IRS’ handy flowchart can help you determine if you qualify for the deduction:

How to Claim the Mortgage Interest Deduction

To claim the mortgage interest deduction, enter the amount of mortgage interest you paid last year as written on your Form 1098, into line 8a of IRS Form 1040. Otherwise, enter it into your tax preparation software in the appropriate spot. The trick is that you have to itemize to be able to claim the mortgage interest deduction.

Most people benefit the most from taking the standard deduction. but you may want to run the numbers first to see if itemizing is a better choice for you. All the leg work is done up front to determine itemizations, and if you choose to itemize and claim the mortgage interest deduction, then simply enter the amount in the corresponding field on your tax return.

Recommended Software to File for the Mortgage Interest Deduction

It can be tough to decide which software you should use to file your taxes online, but overall, software programs make itemization a breeze. They do the math for you to compare whether you should itemize or take the standard deduction. Our top software pics are TurboTax and H&R Block. TurboTax is the industry leader and its easy-to-use interface walks you through the tax forms by using a situational approach and questions.

H&R Block also offers a streamlined approach to filing your taxes online and offers the additional benefit of being able to obtain a refund anticipation loan should you need it.

Tax Software Platform and Tools Prices Audit Customer Support Start Filing

TurboTax

  • Q&A format
  • Interview-style
  • Free federal edition
  • Paid versions for $59.99 to $179.99
  • Free audit support
  • Paid audit defense
  • Real-time access to tax professionals through SmartLook
Start Filing with TurboTax

H&R Block

  • Q&A format
  • Searchable database
  • Free federal edition
  • Paid versions for $49.99 to $94.99
  • Worry-Free Audit Support for $19.99
  • Chat support for all users who purchased a paid package through their Tax Chat feature in-program
Start Filing with H&R Block

Other Tips and Tricks

Have you ever heard someone say that you should not pay off your mortgage because it has tax advantages? They’re usually referring to the mortgage interest deduction. Sure, it’s advantageous to deduct interest on the mortgage if you’re going to pay that interest anyway, but if you’re in a position to pay off your home, don’t let a tax deduction stop you.

Remember, a tax deduction lowers your overall taxable income, it does not save you from paying that amount in taxes. For example, if you are in the 24% tax bracket because you make $100,000 a year and you paid $8,000 in interest on your mortgage last year, the mortgage deduction will only reduce your income to $92,000 and you still would have to pay $16,369.50 in taxes, assuming you had no other deductions or credits. Without the mortgage deduction, you would pay $18,289.50 so the deduction saves you from paying $1,930 to the IRS.

If you didn’t have the mortgage, you would have saved yourself $8,000 in payments, so in this case, the mortgage interest tax deduction is not a good reason to hold onto a mortgage.

Final Thoughts

American homeowners get to take advantage of some great tax perks and you’ll lose out if you qualify for the mortgage interest deduction and don’t claim it. Itemizing may seem like an overwhelming task, but if you use the best online tax filing software, it doesn’t have to be.

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