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- What Are Netting Escrows & How Does It Work?: The Best Guide - January 2, 2024
- The Secret About Prescriptive Easement: Top Guide 1 Must Know - December 4, 2023
- About Home Equity Loans In Texas And How Can One Obtain It - November 27, 2023
About Home Mortgage Interest Deduction (HMID)
Tax season brings a lot of stress for many taxpayers. The only thing that excites many if not all individuals are the tax deductions.
There are many itemized and standard tax deductions allowed to be included while you file your tax return with IRS.
One such tax deduction is the home mortgage interest deduction. In this post, we will understand what home mortgage interest deduction is in detail.
What Is Home Mortgage Interest Deduction?
The home mortgage interest deduction is a tax incentive provided for individuals that own a primary residence.
This type of itemized deduction allows homeowners to deduct the interest they pay on a loan related to the construction, purchase, or improvement of their primary residence from their taxable income, thereby reducing the amount of tax that they must pay.
This deduction can also be claimed for loans to secondary residences as long as it remains within the limits mentioned according to IRS guidelines.
The Tax Cuts and Jobs Act (TCJA), which was signed in 2017, brought major changes in personal income tax by reducing the mortgage interest deduction limit and capping how much an individual is allowed to get mortgage interest deduction from their other home equity products.
Prior to the Tax Cuts and Jobs Act, the mortgage interest deductible limit was $1 million which was changed to the deductible limit of $750,000.
This means that this tax year, single and married couples who apply together can deduct up to $750,000 in mortgage interest deductions if they are single, a co-applicant, or head of household.
Whereas, married taxpayers who apply separately can get the mortgage interest deduction of up to $375,000 each.
Being said that, there are some exceptions to this rule, and these are:
Any residence purchased post-October 13, 1987 and prior to December 16, 2017, still qualifies for the $1 million limits ($500,000 each if married and filed individually).
Any residence that was sold before April 1, 2018, is qualified for the $1 million limit – only if a binding contract was entered into prior to December 15, 2017, to be completed by January 1, 2018, and the home was bought prior to April 1, 2018. Any mortgage contracted before October 13, 1987, is considered a grandfathered debt and does not have any limit.
Any interest you pay on such a mortgage is completely deductible.
For the first year following the introduction of the TCJA, approximately 135.2 million taxpayers were anticipated to choose the standard deduction module.
This compares to the expected 20.4 million, of which 16.46 million would claim the home mortgage interest deduction.
What Type Of Home Mortgage Interest Are Deductible?
In addition to the interest portion of your mortgage payments, you may be able to deduct the following types of mortgage interest:
You can claim any prepayment penalties that are charged for paying your mortgage before time.
You can also claim late payment fees that are charged on your mortgage which are not part of a specific service.
Interest paid while taking part in a Hardest Hit Fund program or the homeowner’s emergency loan program.
You can claim prepaid interest or mortgage points that are paid as part of your closing costs.
You can claim the interest amount paid on your mortgage before selling your home.
You can also claim interest payments on a second mortgage, such as a home equity line of credit or, a home loan but only if the debt was used to purchase, construct or improve your primary or secondary residence.
The deduction of interest amount limit includes both the primary and secondary mortgage.
When you pull out additional cash from your equity through refinance, although you may be entitled to deduct the interest paid on the original amount of your mortgage, you can only deduct the interest paid on the additional cash that you pulled only if those funds are used for home renovations.
Conclusion
Home Mortgage interest deduction is one of the best way to reduce your taxable income.
It is suggested to get in touch with your trusted CPA to check if you can save more on standard deduction or itemized deduction using mortgage interest deduction.
