Image courtesy of StockMonkeys, StockMonkeys
The I.R.S. rules for mortgage interest deductions can significantly reduce your personal income taxes. Learn how to take advantage of this benefit.
Believe it or not, there was a time when people did not pay income taxes. The 16th Amendment to the Constitution and the Revenue Act of 1913 changed that, and are the reasons why we pay income taxes today.
As both a taxpayer and homeowner you have the added advantage of being able to reduce your taxable income by deducting the mortgage interest you pay on your mortgage via the rules set forth in I.R.S. Publication 936.
Mortgage interest is that portion of your mortgage payments which go towards the interest cost of your home loan. Principal payments are not deductible.
The easiest way to find out what you pay for the interest portion of your home loan is by taking a look at Form 1098 which your lender is required to send to you each year. Most lenders send you this form at the beginning of the year before income taxes are due.
If you can't wait, you can also check your December mortgage statement which will show you the total interest you're paying for that month and the total year-to-date total interest already paid.
And if you can't wait until December, check out this amortization schedule. Just provide your loan amount and interest rate to get an estimate of your total interest payments for the year.
A tax deduction is the amount you can reduce from your income, which decreases your taxable income and in turn reduces the amount of taxes you are required to pay. When you borrow a loan to buy, build, or remodel your home, the mortgage interest deduction will reduce your taxable income by the amount of interest you have paid.
Tip: A tax deduction reduces your taxable income. It is not the same as a tax credit which reduces your total taxes on a dollar for dollar basis. In the example above, at a typical income tax bracket of 28%, your tax bill will be reduced by about $4,200!
The I.R.S. has in place rules which govern how you may qualify for and use the mortgage interest deduction benefit. We'll cover the most common rules. You can read more details directly from the I.R.S. here.
The interest you pay on your mortgage is deductible only if you itemize your deductions instead of using the standard deduction when filing your income taxes.
The mortgage from which you are using to deduct your interest must be for a primary or second home only. Additional homes will not qualify for mortgage interest deductions.
Take note that your second home cannot be a rental or income property and must be occupied by the owner at least part-time.
You are not required to be a signer on the mortgage loan, but you must be on the title of your property.
This is a common scenario when parents who have better credit than their children help by signing for a mortgage loan. The child may be making all the payments, but if the child is not on title he/she will not be able to claim the mortgage interest deduction benefit.
To take advantage of the mortgage interest deduction, the interest you pay must be secured by a home as defined by the I.R.S., otherwise it's considered a personal loan which is not tax deductible.
A home is any property that has sleeping, cooking and toilet facilities, such as:
Don't forget to include other expenses which can add to your tax deduction benefits. These include, but are not limited to:
Not all your expenses as a homeowner are tax deductible. The following are common costs many homeowners incur which are unfortunately not tax deductible:
If you own your home with another person whom you do not file taxes jointly with, you can only deduct mortgage interest pro-rata to what you actually paid. Be sure to coordinate with your other owner so there is no confusion or errors which may cause you to either claim too little or too much.
The IRS tax rules for mortgage interest deduction was created to help promote homeownership. As a homeowner you have a unique opportunity not available to other taxpayers to significantly reduce your personal income tax liabilities:
Note: BeSmartee provides the information herein for educational purposes only. This is not tax advice. Be sure to check with your tax specialist.
Real estate agents receive commissions from home buyers and sellers, collectively earning over $50 Billion per year. Learn how commission amounts are set, who pays them, and how they work in this article. Read more.
List of secured property tax rates for all counties of California fiscal year for 2014-2015. Read more.
If you live in California and are over the age of 55 you can effectively reduce your property taxes when buying a new home. Read more.
Houston Vs. Dallas? If you are considering moving to either of these major metropolitan areas, we've created a resource to help you make the decision process a little easier. Read more.
You've heard the term used before, but what does loan closing mean? Find out all you need to know about the process. Read more.
Whenever there is money to be made or money to be spent, some unscrupulous folks will take advantage, trying to game the system or commit all-out fraud. Read more.
Foreign real estate investment in the United States, both commercial and residential, is a huge phenomenon that is only expected to accelerate, maybe even to skyrocket, in 2016. Read more.
In this article, we explore how homeowners insurance works and what happens in the event of a house fire. Read more.
Your DTI is used by mortgage lenders to determine whether you qualify for a loan, and if so, for how much. Improve your DTI with these 16 tips. Read more.
A bankruptcy will make it very difficult to attain a home loan. These 5 tips will help you re-establish your credit quickly in order to qualify for a home loan. Read more.