How Is Mortgage Interest Deduction Calculated?

Your mortgage can bring big tax savings.

Your mortgage can bring big tax savings.

If you have a mortgage on your home, you have a great opportunity to receive some tax benefits. While nobody likes to pay interest, paying interest on a mortgage has its upside when tax-time comes and you reduce your income even more by deducting the interest. You can calculate the mortgage-interest deduction but you need to make sure you keep accurate records to make it simple.

Interest Calculation

If you received an amortization schedule, a schedule showing a principal and interest breakdown for each payment you make, you can find out how much interest you'll pay in that year if you don't make extra principal payments. Simply add all the interest payments you'll make to your mortgage company from January to December of the year. You can also wait until January to receive Form 1098 from your lender that shows the interest you paid for the previous year. If you have a payment due on the first of the month and need extra deductions for the year, pay your January payment near the end of December soon enough so the company records it before December 31.

Schedule A

You'll have to itemize deductions to benefit from your mortgage-interest payment. Use Schedule A to do that. If you itemize, you lose your standard deduction because you can have one or the other but not both. For Head of the Household filing status, the deduction is $8,400 for the tax year 2010. It's $5,700 if you file single or married filing separately and $11,400 for those married filing jointly or a qualifying widow/widower. Compare the amount of interest you pay with the standard deduction. If you find the itemized deduction is greater, then you'll want to itemize.

Add in Points

Points are what you pay to decrease the interest rate on your mortgage. These are also deductible. If they're less than any money you paid, whether as a down payment or as cash toward closing costs, they're deductible in the year you bought your home. If you added the amount into the mortgage, divide the amount paid in points by the number of years you have the mortgage and deduct that amount each year. Normally the lender shows the amount deductible on your 1098 form.

Mortgage Insurance

In 2010, mortgage insurance, the premium you pay if your down payment isn't high enough, is also tax deductible. Add all the yearly premiums together and add this to the points and interest you pay to see whether you have more than the standard deduction.

Other Items

Determine other tax-deductible items. Health insurance, real-estate tax, state tax and work-related items are deductible if they're over a certain percentage of your income. Don't miss a single deduction; even gambling losses up to the amount you won is a deduction. When you add all these with the mortgage items, you can deduct this from your total income but make sure it's larger than the standard deduction. To find the actual tax savings your mortgage brought, subtract the standard deduction from your itemized amount and multiply this times your top tax rate, for instance, 25 percent. That's your tax savings for itemizing and much of it came from mortgage interest.


About the Author

Jay P. Whickson worked as an insurance rep, financial planner and stockbroker from 1979 until her retirement in 2007 when she began writing about the field of finance. Whickson has both a Bachelor of Science and a Master of Science in education from Indiana University. She also has post Masters courses in science and a number of different insurance and investment designations and degrees.

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