If you own and pay a mortgage on your own home, in many cases you can deduct the property tax and mortgage interest you pay every year on your taxes. But that benefit comes with conditions. If you're unsure of your eligibility for deducting costs associated with your new home, seek the advice of a professional accountant or tax preparer before you take either deduction.
Itemization Versus Standard Deduction
First, it's helpful to get a complete understanding of the choice between taking the standard deduction or itemizing. The standard deduction is a flat fee that you can deduct; the amount of the deduction as of 2009 was $5,700 for singles and $11,400 for married couples. When you own a home and make mortgage payments, it's sometimes beneficial to itemize because the total deductible amount may exceed the standard deduction. If you have an inkling that the itemized amount is going to turn out higher than the standard deduction, you should itemize.
So Do You Have to Itemize to Take the Deduction?
If you're filing a personal tax return, the answer to this question is yes, you must itemize to take the deductions. Schedule A has one section for "Taxes You Paid" where you can list real estate taxes paid, and another section for "Interest You Paid" where you can list the mortgage interest for the year. Keep in mind that if you're married and plan to file separately you must choose the same deduction method as your spouse. If your spouse chooses the standard deduction you cannot itemize, which means you cannot deduct property taxes and mortgage interest for that year.
How To Take It
The process of taking the deduction for home-related taxes and interest when itemizing is usually very straightforward. Step one is to wait for your mortgage lender to send you a 1098 form, which lists both expenditures. Step two is to transfer the information to your Schedule A form, along with other itemized costs. In some cases you may have to fill out a worksheet to determine the exact amount you can deduct, so be sure to review the Schedule A instructions or talk to you tax adviser. Additionally, if your mortgage company does not pay your property taxes on your behalf, you may have to contact your local tax collector's office to find out the total taxes paid during the year.
An Exception to the Rule
If you run a small business from home, there may be another way to deduct mortgage interest and property taxes, even if you do not itemize. Form 8829 (Expenses for Business Use of Your Home) allows a company owner to deduct expenses for the portion of his home he uses for business when determining his profit or loss. If this applies to your situation, you must fill out Part II of form 8829, which requests "Deductible mortgage interest" and "Real estate taxes" on two distinct lines.