Will you actually benefit from the Mortgage Interest Deduction?

Mortgage interest deduction

One of the many mysteries of home buying and home affordability is how much of a benefit will you really get from the mortgage interest deduction.

Sometimes, real estate agents, mortgage brokers and mortgage bankers will make the case for you to afford a more expensive home because you’ll receive the mortgage interest deduction. But this isn’t always true. In fact, in most cases it is false.

For some, though, the mortgage interest deduction can be a huge benefit. How do you tell if you fall into this group?

In this piece, we break down how to know if you will actually get the benefit of the mortgage interest deduction and what exactly it is.

What is the mortgage interest deduction?

The mortgage interest deduction is a tax deduction that homeowners can qualify for where a portion of the interest you pay annually for your mortgage can be deducted from the taxes that you owe, leaving you with a lower tax bill and more money in your pocket.

Can I deduct all of my mortgage interest, or is there a limit?

There are limits on the interest you can deduct based on the size of your mortgage. For a complete explanation, please see this article on how large a mortgage you can realize mortgage interest deductions from. 

How do I know how much of a deduction I will get?

The first step is to see if you take the standard deduction  or if you itemize your deductions.

People who take the standard deduction do not get any benefit from the mortgage interest deduction as this only comes into play when you itemize.

Because in 2018, the amount of the standard deduction increased, more homeowners do not get the benefit of the mortgage interest deduction than before, because more people are taking the standard deduction.

Here are the standard deduction amounts for 2018 compared with 2017:

Standard tax deduction

As you can see, the standard deduction nearly doubled. Which leaves many folks who used to take itemized deductions to wonder: do I have enough deductions to itemize that exceed the standard deductions?

So if I don’t itemize my deductions, I get absolutely no benefit from the mortgage interest deduction?

That is correct.

If I do itemize, how do I know how much of a benefit I get from mortgage interest deduction?

Mortgage interest deduction amounts are based on your income. If you make more money, then you can deduct a greater amount of your interest. Here are the percentages of the total amount of mortgage interest that you pay in a year that you can deduct based on 2018 tax brackets (from the Tax Foundation) :

2018 tax brackets

So, if you paid, for example, $10,000 in mortgage interest for the year and are unmarried, making $80,000, you would be able to deduct 24% of that, or, $2,400. But only if you itemize your deductions.

The more money you make and the more interest you pay, the higher a deduction you can take.

How many fewer people are expected to be able to benefit from the Mortgage Interest Deduction due to last year’s changes to the standard deduction amounts?

It is estimated that because of the near doubling in the amount of the standard deduction that there will be a 57% drop in the number of people able to benefit from the mortgage interest deduction this year. Just to give you an example of the numbers, in 2017, 46.5 million people itemized their deductions and in 2018, only 18 million taxpayers are expected to itemize.

If I am buying a home, how do I figure out for certain that I will be able to take the Mortgage Interest Deduction?

The best way is to talk to a tax professional. I know, that’s probably not the advice you wanted to hear. But, taxes can get complicated, and if you want to know for sure, seek the advice of a professional.

Many aspects of your taxes change when you buy a home. For example, you can take certain state and local deductions, like for the property tax that you pay, but again, only if you itemize.

For state and local deductions, there is a new cap on the deductions you can take, which is $10,000 cap. But, if you did not itemize before you bought a home, your property tax deduction and your mortgage interest deduction could make it so that itemizing make sense, whereas previously it did not. For a more complete explanation of this, read this article on the recent changes to the tax laws. Also be aware that with the caps, you may only be able to realize some but not all of the deductions!

That is why especially for new home buyers, it makes especially good sense to run your numbers by a tax professional before making assumptions about affordability or homeownership tax benefits.