Tax deductions allow you to reduce your taxable income and save money. The term "above-the-line" describes deductions that the IRS allows you to subtract from your gross income in order to calculate your adjusted gross income. Under certain conditions, you're allowed to write off mortgage interest on your taxes. Although those deductions are not above the line, they can still potentially save you thousands of dollars in taxes as a below-the-line deduction.
You claim above-the-line deductions at the bottom of page 1 on your IRS tax form 1040 under the section "Adjusted Gross Income." Some of the deductions you can claim above the line are things like traditional IRA, 401(k) and health savings account contributions; moving expenses if you move to a new city to start a new job; interest on your student loans, and tuition fees for attending a qualified post-secondary educational facility.
Below the Line
Below-the-line deductions are itemized deductions you can claim after you've calculated your adjusted gross income. You claim these deductions on Schedule A, form 1040, and report them on page 2 of your 1040 to reduce your adjusted gross income down to your taxable income. Below-the-line deductions include such amounts as charitable donations, medical expenses and interest expenses. They generally have more restrictions, and income and other limits, than above-the-line deductions.
Mortgage interest is a below-the-line deduction that falls under the category of interest expenses. If your mortgage qualifies, you can not only write off your mortgage interest, but also your points and mortgage insurance premiums. Use Schedule A (form 1040) to itemize your mortgage interest deductions under the section titled "Interest You Paid," and report your total itemized deductions on form 1040 under "Tax and Credits."
In order for you to write off your mortgage interest as a below-the-line deduction, your mortgage has to be a secured debt, meaning your home can be used to pay off the loan if you default. The home must be a qualified first or second home. A main home is the one in which you choose to live most of the time. A second home is one you own but don’t hold out for rent. If you rent it out, you must live in it for a minimum of 14 days or 10 percent of the days it was rented out, whichever is longer. According to the IRS rules for the end of 2012, you can fully deduct interest if your mortgage is under $1 million ($500,000 if married filing separately). For home equity lines of credit, however, the limit is $100,000 ($50,000 if married filing separately). If your mortgage comes in above those limits, you can take a partial deduction.
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