Resource Center Co-borrower, Tax

Tax 101: Mortgage Interest Deduction

Mortgage Tax Deduction

Tax Day is almost here. Before you freak out, we have an important topic to cover for homeowners before you file your taxes: the mortgage interest deduction, a.k.a. the biggest deduction most homeowners will have on their tax returns.

At the end of the year, mortgage companies will send homeowners a form 1098 that details all of mortgage interest paid out of each monthly mortgage payment. From that total, taxpayers will be able to deduct from their owed federal taxes.

Let’s take a closer look at what exactly is included in this deduction and what changes we may see in the future.

What can I count as mortgage interest on my tax returns?

For homeowners, mortgage interest is any interest you pay on a loan secured by your primary or secondary home. These loans include a mortgage to buy your home (first mortgage), a second mortgage, a line of credit, or a home equity loan.

You cannot deduct interest on your tax returns on a mortgage loan for a third home, fourth home etc.

How much mortgage interest can I deduct on my tax returns?

If your situation falls within one of these three categories, then you can deduct all of the mortgage interest you paid in the last calendar year, potentially saving you a lot of money on your taxes:

  • Mortgages (taken after October 13, 1987) that totaled $1 million or less throughout the year ($500,000 if you’re married and filing separately from your spouse) that was used to buy, build, or improve your primary or your secondary home.

  • Mortgages (taken before October 13, 1987) that were used to buy, build, or improve your primary or your secondary home.

  • Home equity debt (taken after October 13, 1987) that totaled $100,000 or less ($50,000 if you’re married and filing separately from your spouse) that was taken out on your primary or secondary home.

Who gets to take the mortgage interest tax deduction?

The answer is pretty simple. If you are the primary borrower on the mortgage loan, you can take the deduction. If you’re married and both of you signed for the loan, then both of you are primary borrowers.

However, if you’re helping somebody pay their mortgage, for example a family member (son, daughter, mother, father, Morty the Hippo), but you didn’t co-sign for the loan, then you are not eligible to take the interest deduction on your tax returns.

Your lovely family member takes all the tax benefits and thanks you with an awesome high five.

Is Congress going to eliminate the mortgage interest deduction for future tax years?

This topic is being debated almost every day in our nation’s capital and around the country. Congress is discussing a major tax overhaul and almost all tax deductions, including the mortgage interest deductions, have been put on the discussion table.

Supporters of the mortgage interest deduction say it promotes homeownership and gives the middle class a better shot at financial security.

The deduction helps middle income families build equity in their homes and makes mortgage payments more affordable.

Critics of the mortgage interest rate deduction say that it actually helps higher income families more than middle/lower income families who nowadays are mostly renters and not homeowners. In other words, that the intended purpose of the deduction is not really being met.

They also say that in the tough economic times, any extra tax revenue will help the country move forward.

At MortgageHippo, we believe that the mortgage interest deduction helps families across our country move into the middle class and achieve the dream of homeownership. Any tax overhaul or substitute to the mortgage interest deduction should take this into account and promote accessible homeownership for the middle class.

But don’t be scared my fellow tribe, most of the discussion about the mortgage interest deduction has centered around lowering the limits on mortgages that qualify for the deduction from the current $1 million in principal to $500,000.

It doesn’t seem that the mortgage interest deduction will be eliminated completely. And in any case, this debate will not apply to you this tax year. Let’s see what happens next year for all you potential first-time home buyers.

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