In preparation for filling out your very first tax return as a bona fide homeowner, it's important to learn about possible tax deductions you can take related to your mortgage. You'll find that owning a home has a number of benefits besides warmth and a place to call your own—it also helps reduce your tax obligation.
Mortgage Interest and Points
When you make payments on a mortgage loan over the course of a year, a significant amount of that payment is interest. You can deduct the interest you pay on your mortgage loan on IRS Form 1040 Schedule A (Itemized Deductions) under the section titled "Interest You Paid." In addition to the basic interest, you can also deduct points you paid to close the loan if you've refinanced or just purchased the home in that tax year. If you run a home-business you can also deduct the mortgage interest you pay for the portion of the home you use as an office on your taxes (Form 8829 "Expenses for Business Use of Your Home".)
Mortgage Insurance Premiums
As a condition of some mortgage loans, some borrowers have to pay mortgage insurance premiums (MIP). The mortgage insurance protects the lender in case the borrower is unable to make mortgage payments to cover the liability due to an unexpected event. If your lender requires MIP, you pay these premium payments either as a one-time lump sum, annually or monthly. You can deduct this cost on Schedule A (Itemized Deductions) as well under "Interest You Paid."
Mortgage Tax Credit
If you're a first-time homeowner you may be eligible to take a mortgage tax credit under a mortgage credit certificate (MCC) program, which is commonly run by the state. This program is meant to encourage people to buy homes, but keep in mind that it may not apply to every tax year (check your current year tax forms for verification.) If you're eligible, the MCC allows you to take a portion of the mortgage interest you paid and deduct it as a tax credit on Form 1040. This benefit directly reduces your tax obligation.
So now that you know the possible tax deductions you can take for your mortgage, make sure you gather all of your required documents ahead of tax time. Your mortgage company sends you a Form 1098 form listing any mortgage interest, points and insurance premiums you paid. You have to contact your MCC program (if applicable to your situation) to get paperwork regarding your mortgage tax credit. Keep this information with your tax paperwork before and after filing.