How Much Money Will My Mortgage Interest Help on a Tax Return?

by Michael Keenan

For many people, taking out a mortgage results in an income tax deduction that lowers their tax liability. When budgeting for how much you can afford to spend on a mortgage, you need to keep in mind how much the mortgage will help save you on your tax return.

Only Interest Deductible

Only the interest payments on your mortgage count toward the tax deduction, not the total amount that you pay. Therefore, you need to consult Form 1098, which your mortgage lender mails you at the end of the year, to find out how much interest you paid. Because of amortizing schedules, you generally pay a much larger portion of interest in the initial few years of the mortgage than you do toward the end of the mortgage.

Interest Deduction Limits

You can only deduct the interest on the first $1 million of your mortgage debt. If you are married, but file separately, you and your spouse can each deduct the mortgage interest on half a million of debt. For example, if you are single and have a $3.2 million mortgage, divide $1 million by $3.2 million to find you could only deduct 31.25 percent of the interest you pay on the mortgage. If your mortgage does not exceed the limits, you can deduct all of the interest.

Forgoing the Standard Deduction

When you claim your mortgage interest on your income taxes, you lose your standard deduction. Depending on your other itemized deductions you are eligible to claim, you might not reap the full benefit of the mortgage interest deduction. For example, if you have $2,000 in other itemized deductions, $8,000 in mortgage interest, and a $5,800 standard deduction, you would only reduce your taxable income by $2,200 by itemizing and claiming the mortgage interest deduction.

Calculating Your Savings

To figure how much your mortgage interest saves you, multiply your mortgage interest deduction by your marginal tax rate. For example, if you fall in the 28 percent tax bracket and you reduce your taxable income by $7,000 with your mortgage interest deduction, you will save $1,960 on your income taxes because of the deduction.

About the Author

Mark Kennan is a writer based in the Kansas City area, specializing in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."

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