Still paying the mortgage loan on the house you bought a few summers back? Or are you contemplating buying one in the next few months? Whichever be the case you need to be aware of the changes in the Tax Cuts and Jobs Acts which will impact the tax deductions you can claim on your mortgage interest payments.
How Will You Claim Home Mortgage Interest Deduction?
Well, it’s fairly simple. You can itemize your deductions on Form 1040, Schedule A to claim the mortgage interest deduction. Or you can go for a standard deduction. You can’t do both of them together.
As of 2019, following are the standard deductions, depending on which category you fall into:
- If you choose to file your taxes individually, irrespective of whether you are married or not, then the standard deduction rate has been set at $12,000
- For married taxpayers, filing jointly, it is $24,000
- For qualifying widow or widowers, it is $24,000. However, if you are qualified as the head of the household, the deduction will be set at $18,000
While standard deduction might seem like a good option where you get a lot of deductions, it is better to fill up Schedule A and compare the aggregate of your itemized deduction with your standard deduction. Choose whichever option you think is best for you.
How Will You Qualify For The Mortgage Interest Deduction?
Mortgage interests are payments that you make on the outstanding loan amount that you had taken for the purchase or construction of your house. However, to qualify for a Mortgage Interest Deduction, you will have to fulfil the following conditions:
- The loan that you have taken must be a bona fide loan and it should be in your name It means that you are legally bound to pay back the full amount of the loan along with the interest on it
- The loan cannot be taken under anyone else’s name excepting your spouse. In the latter case, you will qualify for mortgage interest deduction only if you and your spouse are filing jointly
- The Home mortgage loan must be secured by either a land contract or a legal mortgage. Your house will be a security for the loan that you have taken and this should be stated clearly on the mortgage contract or agreement
- If you’ve applied for a loan from your family or for your friends, you must make sure that all the steps to secure the loan have been followed, else, you will not be eligible for it.
- The IRS says that your home, whether it is a condo, or a mobile home like a boat, RV, etc., or a single family dwelling, must have “sleeping, cooking and toilet facilities.”
These are four important rules but along with that, you must remember that mortgage interest deduction is only be charged on your interest payments on loans that you took for purchasing or refurbishing your first or second home. You will not be qualified for mortgage interest deductions for interest on loans taken for the third or fourth home onward.
What is the Ceiling of the Mortgage Interest Deduction?
Regarding the home mortgage interest deduction, the TCJA has brought in some modifications. According to the tax reform, you can only deduct the interest that has been paid on acquisition debt. The acquisition debt is a loan that you take to purchase, build or improve your home. The limit has been reduced to $750,000 from $1,000,000 for married couples filing jointly and lowered to $375,000 from $500,000 for married taxpayers filing their taxes separately. However, this is applicable only for home mortgages taken after the 15th December 2017. Loans taken before 15th December 2017 will have the same deduction rate as before, i.e. $1,000,000 for joint filing and $500,000 for married taxpayers filing separately.
How are You Going To Determine The Amount Of Interest That You Paid?
If you want to know the amount of the interest you have paid, you must take the Form 1098 from your lender at the beginning of the tax year. This form reports the aggregate amount of the interest that you had paid in the previous year. It is based on this form that you can claim your mortgage interest deduction on Schedule A.
We hope this article explains all the complexities of home mortgage interest deduction. If you have more queries, feel free to drop in a mail at firstname.lastname@example.org or call us at (888)-482-0279 for on-call consultation.