Come tax season, everyone wants to know what can be deducted from their taxes. Are your groceries tax deductible? Most likely not. However, there are plenty of other annual expenses you can deduct from your taxes, namely your mortgage. You can do this by deducting your mortgage loan interest from your overall taxes, though there are a few steps you’ll want to keep in mind if you’re planning to do this.
First and foremost, make sure you apply for this. There are a couple requirements necessary before you can deduct your mortgage interest from your taxes. In order to do so, you must file an IRS Form 1040 and itemize your deductions. You must also have a mortgage that’s a secured debt and on a qualified home you own. “Secured debt” means that the loan is guaranteed by collateral, so if the borrower defaults on payments, the lender can take that asset. Mortgages and auto loans are forms of secured debt, as these items can be taken away from you if you don’t make regular payments.
Another thing you’ll need to consider is your current situation and the total price of your loans. When checking how much of your loans are taxable, it depends on whether or not you’re single or married. In 2018, the bar for taxable interest was lowered, so now a couple filing jointly may only deduct on interest up to $750,000 worth of the loan. For an individual person or a couple filing separately, the bar will be lower than this. However, this rule depends on when you signed up for the loan. If you set your mortgage in 2017, the bar limit may vary for you.
You’re also impacted by other factors, like where you live, how much you’ve already spent on your home, and how much the bill impacts your overall tax burden. For example, under the previous tax law, “all property taxes paid to state and local governments could be claimed as an itemized deduction,” according to Forbes. This is no longer the case, as newer laws bundle these taxes together and limit the deduction, in total, to $10,000 for both married and single individuals. This means that if you’re seeking mortgage loans in Louisiana, your deductions will be no different from someone in a pricier area like New York. You may want to plan for that accordingly.
Lastly, the overall cost of your mortgage loan affects whether or not you can deduct all of the interest from your taxes. Though most individuals can deduct most or all of the mortgage loan interest, since the bar of $750,000 is so high, having a pricier home may impact how much of your interest is tax deductible. If you started your mortgage in 2018 and the cost of your house was $1 million, then part of your mortgage interest will not be deductible. Everyone wants homes of distinction, so just plan for this potential hiccup in your tax deductions.
Ultimately, expect to deduct some of the interest from your mortgage loan, if not all of it. If you live in a pricier area where the cost of living or buying a home is higher, you may have to save up some money in order to make up for the fact that you won’t be able to deduct the entire interest of that loan. There are mortgage interest tax deduction calculators out there, which show you what return you could get based on your mortgage loans and information. Just be sure to do your research and consult a financier or accountant about any questions you have in regards to tax deductions.