One of the most confusing tax breaks for taxpayers is the mortgage interest tax deduction. If you were one of the many taxpayers this year that were eligible to deduct mortgage interest but did not, you left a lot of money on the table by overpaying your taxes. It is important to know who is and who is not eligible for the mortgage interest tax deduction, so that you can save yourself some money or stay out of trouble with the IRS for a claimed deduction that you do not qualify for.
Mortgage Interest Deduction
The mortgage interest deduction allows taxpayers who own their homes to reduce their taxable income by the amount of interest paid on the loan, which is secured by their principal residence or a second home. The amount of mortgage interest you can deduct each year is limited.
Home Acquisition Debt
You cannot deduct more than $1,000,000 ($500,000 if married and filing separately) of home acquisition debt. Home acquisition debt means any loan whose purpose is to acquire, construct, or substantially improve a qualified home.
Home Equity Debt
You may not deduct interest that is more than $100,000 of home equity debt. Home equity debt means any loan whose purpose is not to acquire, construct, or substantially improve a new home, or any loan used to sustainably improve a home but exceeded the home acquisition debt limit.
The interest you pay on a mortgage or a home equity line of credit for your primary residence or a second home can be deducted from your income when you:
· File taxes on Form 1040 and itemize your deductions on Schedule A.
· Have secured debt on a qualified home in which you have an ownership interest.
Many people believe that these conditions are simple, but understanding how they apply to different ownership situations can be somewhat complicated. Below we will explain some of the different ownership situations, and how the mortgage interest deduction applies.
When multiple people buy a home together, each owner can deduct the amount of interest they pay, only if they itemize their deductions on Schedule A. Lenders typically send out a mortgage interest statement at the end of the tax year to indicate the total interest paid on the mortgage. Taxpayers are responsible for deducting the correct amount of interest they paid, regardless of whose name or Social Security number is listed on the mortgage interest statement received, as long as they are a legal owner of the property.
Paying Someone Else’s Mortgage
If you help make mortgage payments for a child or friend while they are unemployed, you cannot claim the mortgage interest deduction for someone else’s debt unless you are a legal owner of the property.![endif]-->!--[if>