One of the benefits of owning a home is the tax deductions you can claim. You can deduct the interest that you pay during the year, which could result in significant savings on your income taxes. But how do you claim this deduction? Click through to find out.
When you make your mortgage payment each month, a portion of your dollars will go toward paying down your loan’s principal balance. But a good chunk of your payment will also go toward paying the interest that your loan accrues.
During the earlier days of your mortgage, more of your payment will go toward interest and less will go toward paying down your loan’s balance.
The good news is that you can deduct from your taxes the interest you pay on the first $750,000 of mortgage debt. And if you bought your home before Dec. 16, 2017, you can deduct the interest you pay on the first $1 million of your mortgage debt.
How much will this deduction save you?
How much you save because of the mortgage interest deduction depends on the interest rate attached to your loan, your loan’s term and the size of your loan. It also depends on the age of your loan: You’ll pay less interest the longer you hold on to your loan. With a standard fixed-rate mortgage, you’ll save less on this deduction every year.
Say you take out a 30-year fixed-rate mortgage of $350,000 with an interest rate of 6.5%. During the first year of paying off this mortgage, the interest deduction would save you $8,102 on your taxes.
Your tax savings will fall after this first year. During the 30 years of your loan, your average tax savings would be $4,649 a year.
Is it worth claiming the mortgage interest deduction?
You can only claim this deduction if you itemize on your taxes. This means that you’ll need to determine whether you’ll save more money by itemizing your taxes or by claiming the standard deduction.
For 2023, the standard income tax deduction will rise to $13,850 for single filers and those married who are filing separately. It will increase to $27,700 for joint filers and $20,800 for those filing as head of household.
It only makes sense to itemize on your income taxes if your itemized deductions will equal more than your standard deduction. This might be the case if you run your own business, own rental real estate or are paid as a consultant. But if you are a salaried employee, the odds are high that the standard deduction will net you more money back on your taxes than itemizing your taxes will, even with the mortgage interest deduction.
If you do take the standard deduction, you can’t also deduct the interest you paid on your mortgage during the year.
How do you claim the mortgage interest deduction?
If you do itemize deductions, claiming your mortgage interest deduction is a simple process.
Your lender will send you a Form 1098 in January or early February. This form lists how much you paid in mortgage interest during the year. You’ll get this form if you pay more than $600 in mortgage interest during the year.
The form will list the mortgage interest you paid in Box 1. You’ll enter that figure on Schedule A of Form 1040.
Of course, the numbers tend to change every year and your particular situation may be different. Be sure to work with a financial professional to make sure you are aligned with the latest limits and rules.