The Home Mortgage Interest Deduction is a popular deduction that homeowners use to save on their taxes. It is a part of a category of deductions called “itemized deductions”, such as medical expenses and charitable contributions, which are all reported on Schedule A of Form 1040. As a quick refresher, gathering enough itemized deductions allows a taxpayer to deduct more than the standard deduction and lower their taxable income, which will ultimately lower their tax bill due to the IRS.
Qualifying for the Deduction
In general, to be able to claim the deduction, interest expense payments must be on a secured debt and for a qualified residence. Secured debt are things like a mortgage or land contract. Qualified residence generally means the principal residence of the homeowner. Let’s look at a typical example:
Johnny and June own a modest single-story home in Lakewood, CA. They have a mortgage on the house that they have been paying monthly for the past decade. Of the amount they pay monthly, $200 goes to the interest accrued on that mortgage. The $2,400 they pay during that year can be used for the Home Mortgage Interest Deduction.
The mortgage holder will send homeowners who pay more than $600 in interest a Form 1098 that indicates the amount that a homeowner paid on interest during the year they can claim for the deduction.
Pushed to the (Deduction) Limit
The recently-enacted Tax Cuts and Jobs Act (TCJA) revised some provisions of the deduction amount. Prior to 2018, taxpayers could deduct up to $1,000,000 (for married, filing jointly) on interest paid towards their home mortgage. TCJA pared that limit down to $750,000 (married, filing jointly). Any interest a taxpayer paid over the limit is not deductible.
Utilizing the Home Mortgage Interest Deduction in tandem with other itemized deductions requires some careful planning. Small business owners often already have enough on their plate to concern themselves with. Having a supporting team cover the accounting and tax concerns of the business can free small business owners to focus on their growth goals. MiklosCPA is a California-based firm that serves many small businesses, in assorted industries, with their accounting and tax needs. If you wish to learn more about our services, contact us, and also follow us on our social media pages for future articles like this one and other good-to-know accounting posts.