For many Americans who have a mortgage on their homes, their mortgage represents the largest debt they’ll ever owe. This debt is why the federal government is encouraging big tax breaks for homeowners. Educate yourself on how to take full advantage of these tax breaks.
Mortgage interest deduction
For mortgage borrowers, the biggest tax break is the mortgage interest deduction. This deduction allows you to reduce your taxable income by the amount that has been paid in an account of mortgage interest.
Do all mortgages qualify for the deduction?
According to the IRS tax laws, a homeowner owing mortgage debt can deduct mortgage interest on two separate homes: a primary home and a second home. Whether you are qualifying for one mortgage or both, the same limits apply to the tax deduction.
How much mortgage interest can I deduct?
Different borrowing limits apply to different types of loans. Mortgage interest deduction applies to two different types, home acquisition debt, and home equity debt.
The money which a homeowner borrows to buy, build, or substantially improve his or her home is known as home acquisition debt. The borrowing limit on this type of debt is $1 million for most taxpayers, and those who are married and file separately, the limit is of $500,000. So if you have a $500,000 loan on the first home and $400,000 on second, and you used both loans for a home purchase, then all your interest will be tax deductible because the combined figure of $900,000 is less than the $1 million limit.
A homeowner can also borrow money for other purposes, called home equity debt. The borrowing limit on this type of loan is lower, at just $100,000. If you borrow up to $1.1 million, all the interest will be deductible, but if you borrow more, a prorated portion of your mortgage interest payment will get the deduction.
How does refinancing mortgage affect the interest deduction?
If a homeowner refinance mortgage debt (either home acquisition debt or home equity debt), it retains its original nature as long as you don’t increase the principal amount.
If you own a home or interested buying in the future, then keeping in mind these mortgage tax benefits would really help you. To make your home purchase affordable, you’ll want to take advantage of tax breaks on your mortgage.
If you have any questions related your mortgage tax benefits, please contact our counselors at www.unitedcounselors.org.