The mortgage interest deduction is a significant perk for homeowners, allowing them to reduce their taxable income by the amount of mortgage interest paid, thus lowering their tax bill.
Currently, the maximum mortgage interest deduction is based on a mortgage of up to $750,000. This was a change introduced by the Tax Cuts and Jobs Act (TCJA) in December 2017, which lowered the limit from $1,000,000. This adjustment has particularly affected homeowners in more expensive areas, like San Francisco, where home prices are typically higher than the national average. For instance, a median-priced home in San Francisco is around $1.6 million. With a 20% down payment, the mortgage would be about $1,280,000, exceeding the current mortgage interest deduction cap and resulting in a lower deduction and higher taxes due.
Here’s how the mortgage interest deduction calculation works if your mortgage exceeds the set threshold: First, divide the maximum debt limit ($750,000) by your total mortgage amount to find the percentage of interest that is deductible. Multiply this percentage by the amount of interest paid to find out your deductible amount.
When preparing to file your taxes, start by downloading your Form 1098 mortgage interest statement from your mortgage lender. This form will list the total interest paid over the tax year and other relevant details such as your principal balance and mortgage origination date. If you paid mortgage points or mortgage insurance premiums, these would also be documented.
To claim the mortgage interest deduction, you’ll need to itemize your deductions using Schedule A (Form 1040), which is required in addition to the standard 1040 form. On Schedule A, you’ll find a specific section for entering your mortgage interest information.
Regarding the home mortgage interest deduction limit, there are exceptions that might apply, allowing some taxpayers to claim the previous $1 million limit. These exceptions include mortgages taken out before October 13, 1987 (grandfathered debt), mortgages initiated after October 13, 1987, and before December 16, 2017, and homes purchased under a binding contract by December 15, 2017, that closed before April 1, 2018.
When deciding whether to take the standard deduction or itemize deductions, compare the total of your itemized deductions (including mortgage interest, charitable contributions, and medical expenses) to the standard deduction amount for your filing status. For the 2022 tax year, the standard deduction ranges from $12,950 for single filers and married individuals filing separately, to $25,900 for married couples filing jointly, and $19,400 for heads of households.
The future of the mortgage interest deduction limit is uncertain, but there is speculation that it could be raised back to $1,000,000 to reflect rising home prices and to promote homeownership, especially as housing becomes less affordable nationwide. This would not only help homeowners in high-cost areas but also be a politically popular move, potentially influencing voter support.
In conclusion, understanding the specifics of the mortgage interest deduction and staying informed about potential changes can significantly impact your financial planning and tax strategies.
