Although some homeowners don’t require mortgage loans to pay for their residences, most people do. While regular mortgage payments may take a large chunk of your paycheck, homeowners with mortgages can qualify for certain tax breaks. Deducting your interest payments on your income tax returns may help offset this expense.
Your mortgage refers to the amount you owe your lender on your home. Depending on your lender and the terms of your loan, your monthly payment includes more than principal payments. The interest your bank charges you for your loan is usually included in your monthly payment, as is a percentage of your homeowner’s insurance and real estate taxes.
One of the ways banks realize profits is by charging interest on loans they provide for their customers. The interest rates on mortgage loans vary, depending on the prime lending rate and your personal credit rating. Monthly statements and payment stubs may include a breakdown of your monthly payments, including the amount you regularly pay in interest. At the end of the year, you should expect an annual statement from your lender disclosing the total amount of interest you paid over the tax year.
You may deduct interest on loans that meet certain stipulations. The IRS advises that mortgage interest includes the amount of interest paid on a loan used to purchase your home, a second mortgage, or a home equity loan. You can claim this tax deduction if you file a Form 1040 and itemize your deductions on Schedule A, providing you are legally liable for the loan and have a debtor-creditor relationship with the lender. Your loan must also be on your main home or on a second home that uses the home as collateral for the debt, making it a secured loan.
Tax laws change frequently, and deductions can vary from year to year. The IRS provides extensive information on the stipulations that may limit your ability to claim some or all of your mortgage interest as a deduction on your income taxes. Check with the IRS or your tax accountant to determine what deductions you may take. Certain conditions, such as renting out your home, having a home under construction, or participating in a time-share plan, may limit your ability to take mortgage interest deductions.
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