Mortgage interest deduction: what you need to know to file a claim in 2022 | Business

Buying a home has never been more expensive, but if you can find one you can afford, there’s good news after you move in: you might be able to take advantage of the mortgage interest deduction to reduce your tax bill.

However, the IRS rules regarding the mortgage interest deduction can be very complicated. Ahead of tax season, here’s a guide to help you understand what interest qualifies for the deduction and how you can benefit from it if you’re eligible.

What is the mortgage interest deduction?

If you have a home loan, the mortgage interest deduction may allow you to reduce your taxable income by the amount of interest paid on the loan during the year, as well as other expenses such as bonuses and credit points. mortgage insurance.

The deduction only applies to the interest on your mortgage, not the principal, and to claim it you must itemize your deductions. You can use Bankrate’s Mortgage Interest Deduction Calculator to get an estimate of the kind of savings you can expect when you file your taxes.

The mortgage interest deduction has been around for over 100 years, but has changed over time. Different jurisdictions have changed the rules for this benefit, and former President Donald Trump’s tax reform has impacted who can get it.

Mortgage interest deduction limit

If your home was purchased before December 16, 2017, you can deduct the mortgage interest paid on your first million dollars of mortgage debt ($500,000 if you’re married and filing separately).

For mortgages taken out since that date, you can only deduct interest on the first $750,000 ($375,000 if you’re married and filing separately). Note that if you were in contract before December 15, 2017 and the mortgage was closed before April 1, 2018, your mortgage is considered to have been contracted before December 16, 2017.

Take the mortgage interest deduction for your 2021 tax return

Although almost all homeowners are eligible for the mortgage interest tax deduction, you can only claim it if you itemize your deductions on your federal tax return by filing a Schedule A with Form 1040 or an equivalent form.

For this reason, you will need to decide whether it is better to deduct mortgage interest by itemizing or by taking the standard deduction. The standard deduction for the 2021 tax year is $12,550 for single filers and $25,100 for married taxpayers filing jointly. For the 2022 tax year, these amounts increase to $12,950 for single filers and $25,900 for married joint filers.

Let’s say you’re a single homeowner and you spent $18,000 on mortgage interest in 2021. In this scenario, it would make sense to itemize your deductions, because you’ll reduce your taxable income by more than you would if you had to take the standard deduction.

If you’re not sure which is the best course to take, consult a tax professional to help you understand the best decision to make based on your financial situation.

What is considered mortgage interest?

The general IRS definition of “mortgage interest” is interest that arises from any loan secured by your principal residence or a secondary residence. Other costs and fees may also be included in the mortgage interest deduction. Here is an overview:

—Any interest in your home: The property must include sleeping, cooking and eating facilities and may be a house, condo, co-op, mobile home, boat or recreational vehicle.

—Interest on a second home that you are not renting out – If you are renting out the property for a certain time of year, you will need to follow certain guidelines (in particular, using it for your own use either for more than 14 days or more than 10% of rental time, whichever is longer) to deduct interest. Be sure to ask about other tax deductions for rental property.

—— Most Mortgage Insurance Premiums: For the 2020 tax year, if your Adjusted Gross Income (AGI) is more than $109,000 as a married couple or $54,500 if filing individually, you cannot deduct mortgage insurance costs.

—Late payment fee: If you’re late on a payment, you can probably deduct the additional fees you’re charged.

—Prepayment penalties: If you are charged a penalty fee for prepaying your mortgage, you can deduct this amount.

—Points: If you paid points to lower your mortgage interest rate, you can deduct a portion that applies to the individual deposit year.

— Home equity loans and home equity lines of credit used to improve your home: If you took out a home equity line of credit (HELOC) or home equity loan to pay for a home improvement project, you can deduct the interest on the amount you used to improve your property.

What is not deductible?

—Interest on a mortgage for a third or fourth house

—Any interest on a reverse mortgage

-Home insurance

—Expert fees

-Notary fees

—Closing costs or down payment

—Additional payments made to principal

— Home equity loan funds/HELOC funds used for purposes unrelated to your property (for example, if you borrowed against your house to pay for a wedding, these funds are not deductible)

Special considerations?

When you review the IRS guide to mortgage interest deduction, you will notice a lot of language that details exceptions in certain situations. Below is a partial list of these special considerations. If you have a unique situation, consult the most recent IRS Publication 936 or seek advice from a tax professional.

—Home office complications: If you are using part of your property for a home office, you will need to calculate the specific square footage used for living versus working. The “habitable” space is the only part that qualifies for a mortgage interest deduction.

—House under construction: If you are building a house, you have a 24-month period that qualifies under the mortgage interest deduction guidelines.

—Home sales: If you sold your home last year, you are still allowed to deduct accrued interest on the loan up to, but not including, the date of the sale.

—Paying points when refinancing: If you refinanced your mortgage in 2021 and paid points to lower the rate, you probably won’t be able to fully deduct the cost of those points. Instead, you may be able to deduct some of those points over the term of the new loan.

How do I claim the deduction?

Step 1: Watch for communications from your lender or servicing agent in early 2022. You don’t have to track how much interest you pay; your lender or servicer will take care of this and send you the 1098 form. This should arrive around the end of January or early February, and should also include mortgage insurance premiums and any prepaid interest.

Step 2: Do the math. You’ll need to consider whether itemizing your deductions (your mortgage interest charges and any other allowable deductions) will give you a larger sum than the standard deduction.

Step 3: Submit your Form 1098 to your tax professional or complete Schedule A of Form 1040 yourself. All reported mortgage interest will go to line 8a, any unreported interest will go to line 8b, and insurance premiums mortgage will go to line 8d.

Benefits of mortgage interest deduction?

The main benefit of the mortgage interest deduction is that it can reduce the total tax you pay. Let’s say you’ve paid $10,000 in mortgage interest and you’re in the 32% tax bracket. You reduce your tax bill by $3,200 after subtracting the $10,000 deduction from your income.

“Those in the higher tax brackets will benefit the most because they will receive larger deductions,” notes Kelly Crane, president and chief investment officer of Napa Valley Wealth Management, based in St. Helena, Australia. California.

In fact, lower-income taxpayers get fewer benefits overall, says Andrew Latham, certified personal finance advisor and editor of SuperMoney in Santa Ana, Calif.

“Taxpayers earning less than $100,000 actually only receive 11% of the benefit of this deduction,” Latham said, citing a 2019 report from the Tax Foundation. “In contrast, taxpayers earning $200,000 or more a year get a bigger benefit: 60% of the total savings from the mortgage interest deduction.”

Need more information about filing your taxes in 2022? Read Bankrate’s guide to the upcoming tax season. If you’re lucky enough to qualify for a refund, also consider some of the great ways to invest that amount of money to improve your financial well-being.

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