Understanding the Mortgage Interest Deduction

Itemizing your tax deduction instead of going with the standard deduction can be more work, but it can also lead to a larger deduction. If you have decided to itemize next tax season, you may be curious about the mortgage interest deduction. The following information can help you understand what a mortgage interest deduction is and how it can help you at tax time.

A mortgage interest deduction (MID) is an itemized deduction, so it is only available to people who forgo taking a standard deduction. Not all people are eligible for a standard deduction, but if you are, you must carefully consider if the standard deduction is in your best interest.

mortgage-1“If you are eligible for both options, you may want to determine whether your itemized deductions are more than the standard deduction amount,” states Investopedia. “To be sure, have your tax professional prepare draft tax returns for both options.”

If your tax professional helps you determine that your best course of action is to itemize, then you can begin thinking about a mortgage interest deduction. With an MID, you can deduct the interest you paid on a loan that you used to buy or build a residence. This deduction is not just for new homes, you can also claim a deduction for interest paid on loans that you used to improve your home.

“The mortgage interest deduction (MID) is the largest personal tax deduction on the books and is widely considered one of the most sacrosanct tax benefits in the country because it is seen as making homeownership more affordable for middle-class Americans,” according to Forbes contributors Anthony Randazzo and Dean Stansel.

Many people don’t bother itemizing and many who itemize don’t claim the MID when tax time comes around. Be sure that you aren’t part of the population that misses out on the MID due to misinformation.

“Only 25 percent of all taxpayers claimed a mortgage interest deduction in 2012. Only 32 percent of taxpayers itemize in the first place, and of those 79 percent claim the MID,” according to Anthony Randazzo and Dean Stansel. “Homeowners who simply take the standard deduction on their taxes get no benefit from the MID. And neither do households who rent.”

mortgage-2These numbers are partly due to the fact that many people ignore the MID because they feel that it is only beneficial to people who are wealthy. This is not the case, however, the MID can be helpful no matter your income level. While it is true that people in higher income brackets who have higher mortgages pay more interest and can therefore take a larger deduction, the middle class also benefits from the MID.

“Where the mortgage interest deduction helps middle-class homeowners more than their wealthier peers is in purchasing power,” according to Randazzo and Stansel. “A household making $45,000 in 2012 could expect to buy a home priced 2.7 percent higher than they would have without the mortgage interest deduction. For those making $150,000 the increase in purchasing power because of the MID was only 1.5 percent.”

In order to take full advantage of the MID, talk to your tax professional about your prospects for itemizing and how they compare to your standard deduction, if you are eligible for one. Then you can more easily see how the MID can help your budget and make your home more affordable.

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