How does mortgage interest affect taxes? For all my life I have heard that one of the great advantages of buying a home is the mortgage interest deduction. In the past, this was indeed one of the best tax breaks for the middle class. However, the Tax Cut and Jobs Act (TCJA) of 2017 changed that. Here are some things to know today about this tax break: 

  • Mortgage is 100% deductible from your taxable income. It is not a credit. 
  • You can deduct mortgage interest and property taxes from your income. 

The TCJA almost doubled the standard deduction. Meaning most homeowners never will have enough deductions, including mortgage interest, to make it worthwhile to itemize.  

Is Mortgage Interest 100% Tax Deductible? 

Mortgage interest is 100% tax-deductible to a certain point and under specific conditions. How much is deductible depends on the principal balance of the loan. Since 2017, the maximum Principal is $750,000. Further, many people get credits and deductions confused.  

  • Credits provide a dollar-for-dollar reduction in tax liability. 
  • Deductions reduce taxable income. 

If you have $10,000 of payments and you are in a 24% tax bracket it is true you can deduct the whole $10,000 from your taxable income. However, the amount your taxes will go down will be $2,400.1  

How Much do You Get Back in Taxes for Mortgage Interest? 

How much you get back in taxes depends on several factors. The most consideration is whether you have enough deductions to itemize. The standard deduction almost doubled in 2017, and for most people, they no longer have enough deductions to itemize. Other factors include: 

  • A limit on the principal balance of the loan 
  • What tax bracket you fall into 
  • Your marriage status 

All these factors change periodically. Therefore, you should check from year to year to decide how beneficial this deduction is. In general, though; this deduction is much less beneficial than it has been in the past. This is because the standard deduction is so high not that for most people it does not make sense to itemize.  

At What Income Level do You Lose the Mortgage Interest Deduction? 

There is no income level where you lose the mortgage interest deduction. The limit the IRS uses is on the principal balance of the loan. If your loan originated before December 15, 2017, that limit is $1 million. If your loan originated after that the limit is $750,000. 

Do I Have to Report Mortgage Interest Paid? 

You do not have to report mortgage interest paid, but your lender must report it to the IRS and to you. That is why you receive Form 1098. This form is important because it shows: 

These two pieces of information are necessary for you to calculate your deduction. However, you may decide not to take it if your total itemized deductions are less than your standard deduction. For most people, this is the case. 

Can You Deduct Property Taxes and Mortgage Interest? 

In most cases, you can deduct property taxes and mortgage interest on real estate if you itemize your deductions. They are not exclusive to each other.2  

Mortgage Interest Tax Deduction Calculator 

Several websites have calculators that can help you determine how much you can expect for your deduction. At a minimum you should know: 

  • Your current loan amount 
  • The annual interest rate for your loan 
  • Your marginal tax rate 

CalcXML has a nice, simple calculator that gives you just your deduction.  

Allsate has a more complicated calculator that gives you more tax details, but it also requires you to input more information. 

Bankrate also has a very nice mortgage deduction calculator. 

Mortgage Interest Deduction Example 

Calculating the mortgage interest deduction can be complicated. A simple example is a married couple with one mortgage and under the $750,000 maximum principal balance in 2021. For this example, let’s set the following parameters: 

  • The interest paid is $20,000 
  • Their marginal tax rate is 24% 

In this case, they may deduct the $20,000 off their taxable income. This means that they will pay $4,800 less on their taxes if they itemize. The standard deduction is $25,100 for 2021. Unless they have other deductions to take, it is not worth it to itemize exclusively for the deduction.  

Can I Deduct Property Taxes if I Take the Standard Deduction? 

You cannot deduct either property taxes or mortgage interest if you use the standard deduction. For most homeowners, the amount for mortgage interest and property taxes will not exceed the amount for the standard deduction. Therefore, it will not be worth it to itemize unless you have other deductions for medical bills, education expenses, etc.  

Final Thoughts on How Does Mortgage Interest Affect Taxes 

How does mortgage interest affect taxes? It turns out, not any for most taxpayers. The mortgage interest deduction used to be very important for homeowners, but the Tax Cut and Jobs Act (TCJA) of 2017 changed that. The TCJA almost doubled the standard deduction, so most Americans do not have enough deductions to make it necessary to itemize.  

For most middle-class families deductions fall into four categories: mortgage interest and property taxes, medical bills, education expenses, and charitable giving. Almost certainly, none of these will be more than the standard deduction. However, if you have significant expenses in more than one category then you may want to itemize.  

References 

  1. Investopedia 
  2. Internal Revenue Service (IRS)