The Internal Revenue Service won't give you money unless you give it some first. That means the only way you get money from the IRS is if you overpay it. When you pay your mortgage, the money goes to the bank, not the IRS, so the IRS doesn't have any money to refund you. Relax. All is not lost. You can still get some of your mortgage interest payments back.
How it Doesn't Work
Just so you don't get confused between taxes and taxable income, let's look at an example of what some people think happens with their mortgage interest. If you owe $12,000 in taxes and you paid $10,000 in mortgage interest, you do not get to cut your tax payment down to $2,000. Mortgage interest does not come directly off the taxes you owe.
How it Does Work
This is how it does work. Say you're in the 25 percent effective tax bracket. That means you pay 25 percent of your income in taxes. You can reduce that income by deducting your mortgage interest. Going back to the original example, if you made $50,000 and owe 25 percent tax, you would normally pay $12,500 in taxes. If you paid $10,000 in mortgage, you can subtract that from your income. So $50,000 minus $10,000 means you only owe taxes on $40,000. Multiply by 25 percent and you see you have cut your taxes down to $10,000. You saved $2,500 on your taxes by deducting your mortgage interest from your taxable income.
One Way to Get a Refund
You can get a refund based on your mortgage interest if you had too much money withheld for taxes. Extending the example, if you deduct your mortgage interest from your taxable income and find out you should have had $10,000 withheld for taxes but you had $12,500 withheld, you get a $2,500 refund. Basically, you need to cut down on your withholding for the coming year so you don't loan your money to the IRS. If you instead invest or save that extra $2,500, you'll at least earn a little interest on it.
Another Way to Get a Refund
If you haven't been deducting your mortgage interest over the years, you could have some money coming to you. You can amend your past tax returns to show the mortgage interest deduction you should have been taking. If you paid taxes in those years, the IRS will send you a check to pay you back for your overpayments.
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