Understanding the Mortgage Interest Deduction

Unless you can afford to buy a home with cash, you’ll be paying some interest on a mortgage if you decide to go from being a renter to being a homeowner. Paying interest to a bank is no one’s idea of a good time. The good news, though, is that with the mortgage interest deduction the IRS lets you deduct that mortgage interest from your taxable income when you file your tax returns. Currently you can claim this deduction on mortgages worth up to $750,000. This number was set at $1 million until President Trump signed the new tax law in late 2017.

Let's say you borrowed $800,000 against your primary residence and $400,000 against your secondary residence. Both loans were used solely to acquire or substantially improve the properties. Together, the loans add up to $1.2 million, exceeding the $750,000 limit under the terms of the TCJA.

You can only claim a mortgage interest deduction for the percentage attributable to the first $750,000 you borrowed. Interest associated with that other $450,000 is just money that you spent. You don't get a tax break for it.

Determining How Much Interest You Paid
You should receive a Form 1098, a Mortgage Interest Statement, from your mortgage lender at the beginning of each new tax year. This form reports the total interest you paid during the previous year. You don't have to attach the form to your tax return because the financial institution must also send a copy of Form 1098 directly to the IRS, so the IRS already has it.

Make sure the mortgage interest deduction you claim on Schedule A matches the amount reported on Form 1098. The amount you can deduct might be less than the total amount that appears on the form based on certain limitations. Keep Form 1098 ​with a copy of your filed tax return for at least four years.


​Claiming Home Mortgage Interest
​You must itemize your deductions on Form 1040, Schedule A to claim mortgage interest. This means foregoing the standard deduction for your filing status—it's an either/or situation. You can itemize, or you can claim the standard deduction, but you can't do both.


Is It Worth Itemizing in 2019?
Schedule A also covers many other deductible expenses, including real estate property taxes, medical expenses, and charitable contributions. ​Sometimes all these add up to more than the standard deduction for your filing status, making it worth the time and effort involved with itemizing your deductions. Otherwise, you'll save more tax dollars by skipping the home mortgage interest deduction and claiming the standard deduction instead.

As of the 2019 tax year, the standard deduction is $12,200 for single taxpayers and married taxpayers who filed separate returns, up from $12,000 in the 2018 tax year. It's $24,400 for married taxpayers who filed jointly and for qualifying widow(er)s, up from $24,000 in 2018. And $18,350 for those who qualified as head of household, up from $18,000 in 2018.

This is more than double the standard deductions that were in place in 2017 for the tax return you filed in 2018. As a result, you might not have enough itemized deductions overall to surpass the standard deduction you're entitled to for your filing status.

It's usually advisable to complete Schedule A and compare the total of your itemized deductions to your standard deduction to find out which method is most advantageous for you.

Figuring out the home mortgage interest deduction is straightforward for some taxpayers, but not so much for others. Add up the interest reported on your Forms 1098 and enter the total on Schedule A. You can use the worksheet in Publication 936 to calculate your allowable deduction.

You might want to check with a tax professional, however, if you bought or sold property during the tax year, or if your home acquisition debt exceeds the $750,000 limit. In fact, it would make sense to seek the advice of a tax pro even before you buy or sell real estate if only to get a handle on the tax consequences of your decision.


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