Can you deduct mortgage interest if you take standard deduction

Answer

Yes and maybe.

Mortgage interest paid on a second residence used personally is deductible as long as the mortgage satisfies the same requirements for deductible interest as on a primary residence.

If the home was acquired on or before December 15, 2017, then the total amount you (or your spouse if married filing a joint return) can treat as home acquisition debt on your main and second home is $1,000,000; or $500,000 if married filing separately. If the home was acquired after December 15, 2017, the home acquisition debt limit is $750,000; or $375,000 if married filing separately.

State and local real property taxes are generally deductible.

• Deductible real property taxes include any state or local taxes based on the value of the real property and levied for the general public welfare.
• Deductible real property taxes don't include taxes charged for local benefits and improvements that directly increase the value of the real property, such as assessments for sidewalks, water mains, sewer lines, parking lots, and similar improvements.
• Also, an itemized charge for services to specific property or people isn't a real property tax, even if the charge is paid to the taxing authority. You can't deduct the charge as a real property tax when it's a unit fee for the delivery of a service (such as a $5 fee charged for every 1,000 gallons of water you use), a periodic charge for a residential service (such as a $20 per month or $240 annual fee charged for trash collection), or a flat fee charged for a single service provided by your local government (such as a $30 charge for mowing your lawn because it had grown higher than permitted under a local ordinance).
• The total deduction allowed for all state and local taxes (for example, real property taxes, personal property taxes, and income taxes or sales taxes) is limited to $10,000; or $5,000 if married filing separately.

Renting out your second residence - If you do rent out your second residence, and you use it personally, additional rules may impact the deductibility of mortgage interest and real property taxes. Please see the publications listed below for additional information.

Buying a home has never been more expensive, but if you can find one you can afford, there’s some good news after you move in: You might be able to take advantage of the mortgage interest deduction to lower your tax bill.

IRS rules regarding the mortgage interest deduction can be very complicated, however. As you look ahead to tax season, here’s a guide to help you understand what interest qualifies for the deduction and how you can benefit if you’re eligible.

What is the mortgage interest deduction?

If you have a home loan, the mortgage interest deduction might allow you to reduce your taxable income by the amount of interest paid on the loan during the year, along with some other expenses such as mortgage insurance premiums and points.

The deduction applies only to the interest on your mortgage, not the principal, and to claim it, you need to itemize your deductions. You can use Bankrate’s mortgage interest deduction calculator to get an estimate of the type of savings you can expect when you file your taxes.

The mortgage interest deduction has been around for more than 100 years, but has changed over time. Different administrations have amended the rules for this perk, and former President Donald Trump’s tax reform impacted who can benefit.

Mortgage interest deduction limit

If your home was purchased before Dec. 16, 2017, you can deduct the mortgage interest paid on your first $1 million in mortgage debt ($500,000 if you are married filing separately).

For mortgages taken out since that date, you can only deduct the interest on the first $750,000 ($375,000 if you are married filing separately). Note that if you were under contract before Dec. 15, 2017, and the mortgage closed prior to April 1, 2018, your mortgage is considered to have been before Dec. 16, 2017.

Taking the mortgage interest deduction for your 2021 tax filing

While almost all homeowners qualify for the mortgage interest tax deduction, you can only claim it if you itemize your deductions on your federal income tax return by filing a Schedule A with Form 1040 or an equivalent form.

Because of this, you’ll have to decide whether it’s better to deduct the mortgage interest by itemizing or taking the standard deduction. The standard deduction for tax year 2021 is $12,550 for single filers and $25,100 for married taxpayers filing jointly. For tax year 2022, those amounts are rising to $12,950 for single filers and $25,900 for married joint filers.

Let’s say you’re a single homeowner who spent $18,000 in mortgage interest in 2021. It would make sense in this scenario to itemize your deductions, as you’ll reduce your taxable income by a greater amount than you would if you were to take the standard deduction.

If you’re not sure which is the better route to take, consult a tax professional to help you understand the best move for your financial situation.

What qualifies as mortgage interest?

The IRS general definition of “mortgage interest” is interest that accrues from any loan secured by your primary home or a second home. There are other costs and fees that can be included in the mortgage interest deduction, too. Here’s a rundown:

• Any interest on your home – The property must include sleeping, cooking and eating facilities and can be a home, condo, co-op, mobile home, boat or recreational vehicle.
• Interest on a second home you don’t rent out – If you do rent out the property for a certain period of the year, you’ll need to meet certain guidelines (specifically, using it for your own use either more than 14 days or more than 10 percent of the time it’s rented out, whichever is longer) to deduct the interest. Be sure to read up on other tax deductions for a rental property.
• Most mortgage insurance premiums – For tax year 2020, if your adjusted gross income (AGI) is more than $109,000 as a married couple or $54,500 if filing individually, you can’t deduct mortgage insurance costs.
• Late payment fees – If you’re late on a payment, you can likely deduct the extra fee you’re charged.
• Prepayment penalties – If you’re charged a penalty fee for paying off your mortgage early, you can deduct this amount.
• Points – If you paid points to lower your mortgage interest rate, you can deduct a portion of these that applies to the individual filing year.
• Home equity loans and home equity lines of credit used to improve your home – If you took out a home equity line of credit (HELOC) or home equity loan to pay for a home renovation project, you can deduct interest on the amount you used to upgrade your property.

What is not deductible?

• Interest on a mortgage for a third or fourth home
• Any interest on a reverse mortgage
• Homeowners insurance
• Appraisal fees
• Notary fees
• Closing costs or down payment money
• Extra payments made toward the principal
• Home equity loan funds/HELOC funds used for purposes unrelated to your property (for example, if you borrowed against your home to pay for a wedding, these funds are not deductible)

Special considerations for the mortgage interest deduction

When you review the IRS guide for the mortgage interest deduction, you’ll notice a lot of language that details exceptions in certain situations. Below is a partial list of those special considerations. If you have a unique circumstance, review the most up-to-date IRS Publication 936 or ask a tax professional for guidance.

• Home office complications – If you use a portion of your property for a home office, you’ll need to calculate the specific square footage used for living versus working. The “living” space is the only portion that qualifies for a mortgage interest deduction.
• Home under construction – If you’re building a home, you have a 24-month period that qualifies under mortgage interest deduction guidelines.
• Home sales – If you sold your home last year, you’re still allowed to deduct interest accrued on the loan up to — but not including — the date of the sale.
• Paying points when refinancing – If you refinanced your mortgage in 2021 and paid points to lower the rate, you likely cannot deduct the cost of those points in full. Instead, you may be able to deduct a portion of those points over the life of the new loan.

How to claim the mortgage interest deduction

• Step 1: Watch for communications from your lender or servicer in early 2022. You don’t have to keep track of how much interest you’re paying; your lender or servicer takes care of that and will send you Form 1098. This should arrive near the end of January or sometime in early February, and should also include mortgage insurance premiums and any prepaid interest.
• Step 2: Do the math. You’ll need to determine if itemizing your deductions (your mortgage interest charges and any other eligible deductions) will give you a larger sum than the standard deduction.
• Step 3: Hand your Form 1098 to your tax professional, or complete the Schedule A on Form 1040 on your own. All reported mortgage interest will be entered on line 8a, any unreported will go on line 8b and mortgage insurance premiums will go on line 8d.

Benefits of the mortgage interest deduction

The key benefit of taking the mortgage interest deduction is that it can decrease the total tax you pay. Let’s say you paid $10,000 in mortgage interest and are in the 32 percent tax bracket. You’ll lower your tax bill by $3,200 after subtracting the $10,000 deduction from your income.

“Those in higher tax brackets will benefit the most as they will see larger deductions,” notes Kelly Crane, president and chief investment officer of Napa Valley Wealth Management, based in St. Helena, California.

In fact, lower-earning taxpayers get less benefit overall, explains Andrew Latham, a certified personal finance counselor and managing editor at SuperMoney in Santa Ana, California.

“Taxpayers who make less than $100,000 actually only receive 11 percent of the benefits from this deduction,” Latham says, citing a 2019 report by the Tax Foundation. “By contrast, taxpayers who earn $200,000 or more a year get a bigger benefit — 60 percent of the total savings from the mortgage interest deduction.”

Need more information on filing your taxes in 2022? Read Bankrate’s guide for the upcoming tax season. If you’re lucky enough to qualify for a refund, also consider some of the great ways to invest that chunk of money to enhance your financial well-being.

Learn more:

• Cryptocurrency taxes: A guide to tax rules for Bitcoin, Ethereum and more
• Is a state with no income tax better or worse for your finances?
• State and local tax (SALT) deduction: What it is and how it works

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