The short answer is no. The mortgage deduction has no effect on your adjusted gross income (AGI). In fact, AGI only includes a select handful of deductions, and most other deductions and exemptions are subtracted after AGI is calculated -- including the mortgage deduction.
Gross income, AGI, and taxable income
In order to understand how the mortgage deduction affects your income, it's important to know three different measurements of income that the IRS uses.
Gross income: This refers to all of your income, and is the initial number that will help determine how much you owe in taxes. Gross income includes the money you make from all sources, including income from your job as well as investment income such as capital gains and dividends.
Adjusted gross income (AGI): This is your gross income, minus a few specific adjustments, also known as "above the line" deductions. These could change over time, but some of the current adjustments include:
- Classroom expenses paid for by teachers, up to $250
- Moving expenses when searching for a new job
- Student loan interest and tuition
- Deductible retirement account contributions, such as to a traditional IRA
- Alimony payments you're required to make
Taxable income: This is the figure that determines how much tax you'll pay, and is equal to your AGI minus all of the exemptions and deductions to which you're entitled, including the mortgage deduction.
Why AGI is important
Adjusted gross income is an important figure because it determines your eligibility (or lack thereof) for several valuable tax breaks. For example, the American Opportunity Tax Credit, which is worth up to $2,500 per year toward educational expenses, requires an AGI of $80,000 or less for single filers ($160,000 if married filing jointly). As you'll see, a portion of the mortgage deduction also depends on your AGI.
What is the mortgage deduction?
The phrase "mortgage deduction" is generally used to refer to the deduction for mortgage interest. The IRS allows a tax deduction for mortgage interest on both a first and second home, for up to $1,000,000 in original principal balances. However, there are a couple more mortgage-related deductions to be aware of.
If you paid points when you got your mortgage, those are also deductible as home mortgage interest. Points are either deductible all at once in the year you pay them or may be spread out over the life of the mortgage, depending on your circumstances. Mortgage insurance premiums are also deductible as a mortgage interest expense, but this part of the "mortgage deduction" begins to phase out for AGI above $100,000 and is eliminated for AGI above $109,000.
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