[ad_1]
Your guide to mortgage tax deductions for 2021
It’s about time to start filing your 2021 taxes. And many homeowners will be wondering about mortgage tax deductions.
As a general rule of thumb, you can only deduct some mortgage costs — and only if you itemize your deductions. If you’re taking the standard deduction, you can disregard the rest of this information because it won’t apply.
So, which mortgage costs are tax-deductible and which aren’t? Here’s what you should know.
Note: We are exploring only federal tax deductions for the 2021 tax year, filed in 2022. Those for state taxes will vary. This article is for general informational purposes only. The Mortgage Reports is not a tax website. Check the relevant Internal Revenue Service (IRS) rules with a qualified tax professional to ensure they apply in your personal circumstances.
In this article (Skip to…)
How mortgage tax deductions work
Before you worry too much about making mortgage tax deductions, let’s make sure they apply to you.
As mentioned above, mortgage expenses are only tax-deductible if you decide to itemize your deductions. If you take the standard deduction, they won’t apply.
In the 2018 tax year, only 11.4% of individual taxpayers made itemized deductions according to the IRS. The others preferred to make the standard deduction.
Standard deduction for 2021 taxes
If you take the standard deduction, you can’t itemize any other deductions, including those related to your mortgage. So nothing in this article applies to you.
For 2021 tax returns, the government has raised the standard deduction to:
- Single or married filing separately — $12,550
- Married filing jointly or qualifying widow(er) — $25,100
- Head of household — $18,800
If your deductible items don’t add up to more than that, you’re typically better off taking the standard deduction.
Mortgage interest tax deductions
So you plan to itemize your deductions for the 2021 tax year. What does that mean for your mortgage tax deductions?
Your biggest tax break should come from the mortgage interest you pay. That’s not your full monthly payment. The amount you pay toward your loan principal isn’t deductible. Only the interest portion of your payment is.
Depending on how big your mortgage is, you may encounter a cap on the interest you can deduct.
If your mortgage was in place on December 14, 2017, you can deduct interest on a debt of up to $1 million ($500,000 each, if you’re married and file separate returns). But if you took out your mortgage after that date, the cap is $750,000.
To be clear, if your mortgage is higher than $1 million or $750,000, whichever applies, you can still deduct some interest. But only for interest paid on a loan amount up to those caps.
Private mortgage insurance tax deductions
According to IRS Publication 936, “You can treat amounts you paid during 2021 for qualified mortgage insurance as home mortgage interest. The insurance must be in connection with home acquisition debt, and the insurance contract must have been issued after 2006.”
That means you can deduct mortgage insurance paid throughout the year, but only if the loan was used to purchase your home.
However, there’s an income cap.
If your adjusted gross income (AGI) is below $100,000 ($50,000 if married and filing separately), you can deduct your mortgage insurance premiums in full. But if your AGI is $109,000 ($54,500 if married and filing separately) or higher, you can deduct none of them. In between the $100,000 and $109,000 the proportion you can deduct drops progressively.
Don’t bank on being able to deduct mortgage insurance premiums in future years. It was supposed to have been abolished years ago. But Congress keeps renewing it on a year-by-year basis. And, one day, it might not.
Closing cost tax deductions
Only some closing costs are deductible. Those are usually:
- Property taxes paid in advance at closing
- Discount points — See below
- Prepaid interest — The interest you pay for the remainder of the month in which you close
- Origination fees — The amount your lender charges for processing your application
- Mortgage insurance premiums — In some circumstances. See above
No other closing costs (home appraisal, inspection, escrow fees, title insurance, and so on) are generally deductible.
Second home tax deductions
You can make mortgage interest deductions on a second home (perhaps a vacation home) as well as your main residence. But the mortgage(s) must have been used to “buy, build, or substantially improve” the property, in the words of turbotax. And there’s a limit of two homes; you cannot deduct interest on three or more.
If that second home is owned by your son, daughter, or parents, and you’re paying the mortgage to help out, you can only deduct the interest if you co-signed the loan.
Second mortgage tax deductions
You may be able to deduct interest on a second mortgage, usually a home equity loan or home equity line of credit (HELOC). But, since 2018, you can only do so if you used the money to buy, build, or substantially improve your main residence or second home. Older loans have no such rule.
Again, there’s a cap. You can only deduct the interest on the first $100,000 of your second mortgage’s value.
Refinance tax deductions
A “rate-and-term refinance” is one where your new mortgage balance is effectively the same as your old one. A rate-and-term refinance should not generate any new tax deductions.
However, a cash-out refinance may change things.
You can still deduct interest on your original mortgage balance. But you can only deduct interest on the cash-out amount if it was used to buy, build, or substantially improve your main residence or second home.
So you won’t be able to deduct interest on cash-out money you used for any other purpose, such as debt consolidation, a family wedding, a vacation, and so on.
The good news is that you do not have to pay income tax on funds received from cash-out refinance. It’s a loan that has to be repaid with interest. So it’s not taxable income.
Discount point tax deductions
Discount points (aka “mortgage points”) allow you to buy yourself a lower mortgage rate by paying a lump sum at closing. In the past, you could deduct the cost of discount points at the end of the tax year in which you paid the lump sum. But no more.
Now, you can still deduct discount points but only pro-rata over the lifetime of your loan.
For example, if you have a 30-year mortgage, you deduct one-thirtieth of the lump sum each year. With a 15-year loan, you deduct one-fifteenth.
If you refinance with a different lender within the lifetime of the mortgage, you can deduct all the remaining points costs in that year. But if you refinance with the same lender, you continue as before.
Mortgage tax deduction FAQ
You can’t deduct your full monthly payment. But you can deduct the portion of it that goes to interest. At the start of your loan, a large portion of each monthly payment is interest. By the end, almost none of it is. The portion falls steadily over the life of your mortgage. Again, you can only make this deduction if you itemize your deductions.
Yes. But not as a lump sum. With a 30-year mortgage, you deduct one-thirtieth of the cost of the points each year. With a 15-year loan, you deduct one-fifteenth. And so on.
Yes, for the 2021 tax year, provided your adjusted gross income (AGI) is below $100,000 ($50,000 if married and filing separately). Above $109,000 ($54,500 if married and filing separately) you can’t make any deductions for mortgage insurance. Between those two incomes, you can deduct progressively less for each extra $1,000 you earn.
You don’t pay tax on the amount you cash out. It’s a loan like any other and those aren’t taxable as income. But you may be able to deduct interest paid on the cash-out amount if the money was used to buy, build, or substantially improve your primary or second home.
Again, interest on home equity loans isn’t usually tax-deductible. But it should be if you used the proceeds of your loan to buy, build, or substantially improve your main residence or second home.
A HELOC is a second mortgage, just like a home equity loan. And the rules are the same. Namely, you can only deduct the interest if you used the proceeds of your loan to buy, build, or substantially improve your main residence or second home.
Some can be. But it’s a shortlist that mostly involves small sums. However, you can deduct your lender’s origination fees (even if your lender paid them for you), which can be worthwhile. See above for the full list. Other than that, you can’t deduct most of the big-ticket items, such as fees for your appraisal, inspection, title insurance, escrow fees, and so on.
The bottom line
The bottom line is that mortgage expenses are only tax-deductible if you itemize your taxes rather than taking the standard deduction. And even then, the rules can be complex.
The Mortgage Reports is not a tax website and this information is meant for general guidance only. Speak with a licensed tax professional about your situation before taking any next steps.
If you prefer, the IRS has an online, interactive tax assistant (“Can I Deduct My Mortgage-Related Expenses?“) that might help you. And you can also download the IRS Publication 936 guide, “Home Mortgage Interest Deduction. For use in preparing 2021 Returns” from its website.
[ad_2]
Source link
