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Can I Deduct My Mortgage Interest?

By Matthew Frankel, CFP® - Apr 5, 2017 at 7:47AM

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Most homeowners can deduct the interest they pay, but it may not be the best idea for everyone.

The short answer to this question is "yes." As long as your mortgage is on a first or second home and you're talking about $1 million of mortgage debt or less, you have the ability to deduct your mortgage interest.

However, only about 22% of all individual tax returns claim the mortgage interest deduction, far lower than the homeownership rate in the United States. Here's a closer look at the mortgage interest deduction, why so many taxpayers can't use it, and whether you'll be able to deduct your mortgage interest.

Miniature house, keys, and calculator with stack of money.

Image source: Getty Images.

The mortgage interest tax deduction

As of 2017, the IRS allows homeowners to deduct the interest they pay on their primary residence and/or second home, up to a maximum of $1 million in original mortgage principal. This can include more than one separate loan, as long as the total is below the $1 million limit, and includes loans you obtained to refinance your home, as well as mortgages obtained to purchase the home.

In addition, the interest on home equity debt is deductible, but up to a lower borrowing limit of $100,000 for most people. The limits for both types of mortgage debt are the same for single taxpayers and married couples filing joint returns, but are cut in half for married couples filing separately, to $500,000 and $50,000, respectively.

Also, it's worth mentioning that there are a few other deductible items in addition to the interest you pay on your mortgage. Property tax is deductible, as are discount points you paid when you obtained the mortgage. Private mortgage insurance (PMI) premiums are also deductible, but are subject to income limits, and this deduction technically expired at the end of 2016 and hasn't been extended as of this writing.

As you can probably imagine, the tax-deductible costs of homeownership can add up to a substantial amount of money each year.

The caveat: You need to itemize

The main reason that so few taxpayers claim the deduction on their return is that you need to itemize deductions in order to use it.

When you file your tax return, you have a choice between itemized deductions (basically, all of your individual tax deductions added together) or the standard deduction. And for itemizing to be worthwhile, your deductions must add up to more than the standard deduction, which is currently:

  • $6,350 for single and married filing separately
  • $9,350 for head of household
  • $12,700 for married filing jointly

As you can probably imagine, many taxpayers' deductions don't cross these thresholds and therefore claiming the mortgage interest deduction simply doesn't make good financial sense.

So, can you deduct your mortgage interest?

As I mentioned in the previous section, if your itemized deductions, including mortgage interest, add up to more than your standard deduction, you can and should deduct your mortgage interest. Here's a more complete discussion of who should itemize, but some of the biggest itemized deductions include charitable contributions and medical expenses over 10% of your income.

The bottom line is that if you even think that your itemized deductions could be higher than your standard deduction, it's worth the time to figure out your taxes both ways to see which saves you the most money. If itemizing is the best choice for you, deducting your mortgage interest could put more money back in your pocket at tax time.

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