Though interest is clearly a way for a bank to get richer, paying it on a mortgage loan does come with benefits. In most cases, you can deduct the cost of your mortgage interest for the year on your taxes. Since you often pay thousands each year in mortgage interest, this is a very significant deduction for young homeowners like you.
To take mortgage interest as a tax deduction you must itemize deductions. If you decide to take the standard deduction ($11,400 for married couples filing jointly as of 2010), there's no need to account for your mortgage interest for the year on Schedule A (Itemized Deductions). But if you decide that it's best for you to itemize, gather information about your mortgage account to take this common deduction.
Wait for Your 1098
Your lender sends you a 1098 form at the beginning of the year so that you can account for the interest you paid during the previous year. Wait for this form before you take the deduction to ensure you're listing the right amount on your Schedule A form. You can also look at the last mortgage statement from the previous year if you want to estimate the total interest you paid.
Record the Deduction
Schedule A is a fairly straightforward form to fill out. It has seven main sections for various potential deductions, including the "Interest You Paid" area where you can list your mortgage interest deduction. After filling in the total of your mortgage interest deduction, add it with the other sections to determine your total itemized deductions. When you transfer this amount to Form 1040, your taxable income.is reduced.
Allowable Home Interest
You can deduct interest that you pay for a loan on your first or second home (new or refinanced). You also can include interest costs from a home equity loan. A home, by the IRS definition, "must provide basic living accommodations including sleeping space, toilet, and cooking facilities." You also have limits on your interest deduction if you used your mortgage funds for anything other than home building, buying or improvement.