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Paying taxes is never much fun. And no matter how you slice it, paying interest — even on a mortgage — is depressing. This is why it is nice in some cases be able to see tax advantages from having a mortgage. You can deduct your mortgage interest to lower your taxable income. This also includes the interest you pay on some second home mortgage loans. You can also deduct for points you pay, if you are getting a new home mortgage. It’s actually fairly straightforward. In any case, it is a good idea to consider the tax efficiency involved with your mortgage, as well as the deductions available to you through your other assets and even — possibly — some of your losses.
Deducting your mortgage interest
It is important to note that your tax form comes with a standard deduction. Right now, that standard deduction is as follows:
- Single: $5,700
- Head of Household: $8,350
- Married Filing Separately: $5,700
- Married Filing Jointly: $11,400
You can only take the mortgage interest rate deduction if you are using Schedule A to itemize your deductions, and forgoing your right to the standard deduction. This means you need to add up your itemized deductions on Schedule A and make sure that the sum exceeds the amount you are eligible for in terms of a standard deduction. For example, if you are Married Filing Jointly, and you paid $10,000 in mortgage interest, you are still better off taking the standard deduction. However, if you gave $2,000 to charity this year, you can add that $2,000 to your $10,000 for $12,000. When you combine your mortgage interest paid with other items on Schedule A, you can increase the amount by which you lower your taxable income. It is also worth noting that your property taxes and PMI are also tax deductible on Schedule A.
Deducting home mortgage points
Another item that appears on Schedule A is the ability to deduct home mortgage points. You can deduct your mortgage points, in full, the year they are paid if you meet these following requirements set forth by the IRS:
- Your primary residence secures the home mortgage loan.
- Your primary residence (build or purchase) is the subject of the loan.
- Paying points is an established practice in your area.
- Points paid did not exceed the average for that area and loan.
- You use a cash method of accounting.
- The points were not paid for separate items, such as taxes, attorney fees, appraisal fees and other fees that are normally separated out on the settlement sheet.
- You did not borrow in order to pay the points.
- The points were computed as a percentage of the principal of the mortgage.
- The amount of points paid is shown clearly on your settlement statement.
If you meet the above conditions, you can deduct the points paid. This can actually be a bonus in other ways, since it will lower your interest rate, and save you money in interest fees over the life of your home mortgage loan. And, have a tax deduction doesn’t, hurt, either.
While having a mortgage is unpalatable in many cases (after all, it is debt), you can reduce the negative impact that comes with paying interest. You can reap a tax advantage with proper planning. Before you take this advantage, though, it is a good idea to double check with a tax professional, or check with the IRS.