The mortgage interest deduction can be a valuable one for taxpayers who own a house and are paying off a mortgage loan. But claiming the amount of mortgage interest that you paid during the year means that you can't file your taxes with the IRS's two short forms, 1040EZ and 1040A.
Mortgage Interest Deduction and Savings
Homeowners who are paying off a mortgage loan can claim the interest they've paid on these loans each year on their income taxes. This is a valuable deduction. The National Association of Home Builders says that a family with a joint income of $80,000 and a mortgage loan for $180,000 with an interest rate of 5.5 percent will save more than $7,000 in taxes during the first five years that they own their residence. These tax savings make the mortgage interest deduction a valuable one to claim.
Claiming Mortgage Interest Deduction
To claim your mortgage interest deduction, you'll need to use the IRS Form 1040, also known as the long form. This is the IRS form that allows you to list your deductions. Each year, your mortgage lender will send you a Form 1098, otherwise known as a mortgage interest statement. This form will list how much you paid in mortgage interest during the year. Enter this amount on line 10 of IRS Schedule A. You then include the amount of your total deductions, including mortgage interest, on line 37 of your 1040 form.
Is it Worth it?
It generally makes financial sense to fill out the extra paperwork to claim your mortgage interest deduction, especially in the earlier years of owning your home. During these years, the majority of your monthly mortgage payments go toward interest. The IRS standard deduction as of 2013 -- which you can claim by filing forms 1040A or 1040EZ -- is $6,100 for taxpayers filing singly and $12,200 for married taxpayers filing jointly. If your mortgage interest deduction plus any other deductions would push you past this limit, it generally makes sense to fill out the long form and take these deductions instead of the standard deduction.
If you do decide to claim the mortgage interest deduction, be aware of certain limits. You can deduct the interest you paid on all mortgages used to buy, improve or build a home. If you are married and filing your taxes jointly, you can deduct the interest you paid on up to $1 million worth of mortgage loans. If you are filing separately, you can deduct the interest you paid on up to $500,000 worth of mortgage loans. You can also deduct the interest you paid on up to $100,000 worth of home equity loans or home equity lines of credit if you are married and filing jointly. If you are filing separately, you can deduct the interest you paid on up to $50,000 of these equity loans. Those with high incomes may not be able to take the full value of the interest they paid even if it's below these thresholds.
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