Though paying your mortgage each month is an expensive obligation, there is one significant benefit. In many cases, the IRS allows you to deduct the portion of your payment that you pay for mortgage interest each month during a year. You take this deduction on Schedule A, Form 1040, but keep in mind that your deduction may be limited — the exact limitation varies depending on your individual tax situation. You also should note that the exact rules may vary by tax year.
Interest You Paid
Open up a Schedule A form and review the various sections. You'll see a section entitled "Interest You Paid." This is the section where you can list and deduct your mortgage interest. The mortgage lender sends you a form 1098 each year listing the total amount of mortgage interest you paid — this is the amount you enter on Schedule A. However, before you do, find out if the deduction is limited.
October 13, 1987
IRS rules state that your mortgage interest deduction may be limited if you took out the loan after October 13, 1987. This includes new standard mortgages, lines of credit and refinanced mortgages. Any new homeowner who has recently taken a loan should research potential limitations before proceeding with Schedule A. IRS Publication 936 shows you how to figure out your mortgage interest deduction, if it's limited. You need to pull out Publication 936 if you meet one of two conditions.
If you used the money you received from the mortgage for anything other than purchasing, building or bettering the home, you need to use Publication 936 to determine the deductible interest amount. This applies for loans totaling over $100,000 during the tax year, or $50,000 for married filing separately, as of 2009. An example of a situation where you might have used the mortgage proceeds for something other than the home is if you paid off credit card debt during a refinancing.
The other situation where you may have limitations on your mortgage interest deduction is if you used the funds specifically for the home and your loans totaled more than $1 million, or half a million if you choose married filing separately as your status, during the filing year. This includes mortgages you established both before and after October 13, 1987. The IRS may also limit the interest deduction if your home's fair market value is less than the total of your mortgage balance during the year.