The mortgage interest deduction is a positive benefit for homeowners. This itemized deduction allows homeowners to subtract mortgage interest from their taxable income, thereby lowering the amount of taxes they owe.
The current maximum mortgage interest deduction is based on a $750,000 mortgage amount. Before the Tax Cuts And Jobs Act (TCJA) passed in December 2017, the maximum mortgage interest deduction was based on a $1,000,000 mortgage amount. Therefore, starting in 2018, the TCJA has had a marginally negative impact for homeowners living in more expensive parts of the country.
For example, the median home price in San Francisco is about $1.6 million. After putting 20% down, you're left with $1,280,000, most of which is usually borrowed through a mortgage. With a lower mortgage interest deduction maximum threshold, the homeowner gets a lower deduction and has to pay more taxes.
Given I just filed my taxes, I'd like to provide an example of how the mortgage interest deduction works. Specifically, I want to show how the mortgage interest deduction is calculated if you have a mortgage amount that is above the maximum threshold.
In a nutshell, to calculate your mortgage interest deduction, divide the maximum debt limit by your remaining mortgage balance, then multiply that result by the interest paid to figure out your deduction.
Note: The tax extension deadline is Monday, October 16, 2023
First Obtain Your 1098 Mortgage Interest Statement
Download your Form 1098 mortgage interest statement from your mortgage lender. This is what the form looks like.
Box 1 – This is the total interest you paid for the tax year. It does not include points.
Box 2 – The amount shown here is the remaining balance on your principal balance.
Box 3 – The mortgage origination date is the date you closed on the property and signed the deed.
Box 4 – If you received a refund of any overpaid interest, it will be included in this box.
Box 5 – Mortgage insurance premiums (MIP) are used by Federal Housing Administration (FHA) lenders to protect themselves against borrowers who are more likely to default. If you have an FHA-backed mortgage, those MIP fees will be listed here.
Box 6 – Mortgage points are fees paid to a lender in exchange for a lower interest rate. Generally, the points reported here are fully deductible in the year paid.
Box 7 – If the property’s address is the same as the borrower’s address, either the box is checked or the address is entered into box 8.
Box 8 – This is the address or description of the property securing the mortgage.
Box 9 – If there is more than one property under the loan, the total number is entered here. The box may be empty if only one property secures the loan.
Box 10 – Other information, such as real estate taxes and insurance paid from escrow will be included in this space.
Box 11 – If the lender acquired the mortgage during the calendar year, the acquisition date is entered here. Otherwise, it will remain blank.
If you have more than one qualified mortgage, you should receive a separate Form 1098 for each property.
Once you have your 1098, you then input the data into your tax software. From there, it will print out a form.
How To Calculate Mortgage Interest Deduction If The Amount Is Over The Maximum Threshold
Once you've got the Form 1098 Mortgage Interest Statement you will need to itemize your deductions to claim the mortgage interest deduction. Since mortgage interest is an itemized deduction, you’ll use Schedule A (Form 1040), which is an itemized tax form, in addition to the standard 1040 form.
This form also lists other deductions, including medical and dental expenses, taxes you paid and donations to charity. You can find the mortgage interest deduction part on line 8 of the form. You’ll put in the mortgage interest information found on your 1098 in that section.
In this example below, the average mortgage balance was $1,549,870, or $799,870 above the $750,000 mortgage balance threshold to be able to deduct mortgage interest.
Therefore, you take $750,000 divided by the average balance of $1,549,870 to get 48.4%. You then multiply 48.39% by the total amount of mortgage interest paid in that year, which is $32,520 in this example. The end result is that this homeowner can only deduct $15,740 in mortgage interest expense for their income.
For more information on the home mortgage interest deduction, see IRS Publication 936.
Exceptions To The Mortgage Interest Tax Deduction Limit:
There are three exceptions to the mortgage interest tax deduction limit of $750,000 for married couples filing jointly, single filers, and heads of households. They are:
- Any mortgage taken out before October 13, 1987, is considered grandfathered debt and is not limited. All of the interest you pay is fully deductible.
- Any home purchased after October 13, 1987, and before December 16, 2017, is still eligible for the $1 million limit ($500,000 each, if married filing separately).
- Any home that was sold before April 1, 2018, is eligible for the $1 million limit – only if there was a binding contract entered before December 15, 2017, to close before January 1, 2018, and the home was purchased before April 1, 2018
Standard Deduction Or Itemized Deduction
To get the maximum home mortgage interest deduction, you'll have to run the calculation and compare the amount to the standard deduction.
For the 2022 tax year, which will be the relevant year for 2023 tax payments, the standard deduction is:
- $12,950 for single filing status
- $25,900 for married, filing jointly
- $12,950 for married, filing separately
- $19,400 for heads of households
Therefore, if your home mortgage interest deduction, student loan interest, charitable contributions, medical expenses, and other deductions do NOT total more than the standard deduction limits, then you would choose the standard deduction. This way, you get the largest deduction and get to pay the least amount in taxes.
If you choose the standard deduction, you will not need to complete more forms and provide proof for all of your deductions. Every taxpayer gets it. Expect the standard deduction amount to increase every year to keep up with inflation.
If you choose an itemized deduction, you need to prove the deductions by filling out additional forms. The IRS likely won't check your work, but you will need to provide receipts if it does.
Greater Mortgage Interest Deduction In The Future
I believe that the mortgage interest deduction limit will go back to $1,000,000 in the future. Home prices have risen significantly since the limit was reduced to $750,000 in 2018. If the government wants to make homeownership more affordable, then it will raise the mortgage interest deduction limit.
We've seen the estate tax threshold and Social Security tax benefits go up every year since 2018. Why shouldn't the mortgage interest deduction limit follow suit as well?
Inflation has caused almost everything to go up. Does the government really want to worsen housing affordability and create a larger nation of renters? That doesn't seem wise.
Yes, some will say the mortgage interest deduction is a tax break for wealthier people. However, roughly half the American population lives in expensive coastal cities.
Further, wealthier people pay a greater share of overall taxes. As you can see from the Tax Foundation chart above, the top 5% income earners who make 38.1% of total adjusted gross income pay 62.7% of total income taxes paid.
Whether someone is taking the standard deduction or the itemized deduction, they are both arbitrary tax breaks. Politicians who want to stay in power or get into power could easily gain more votes by increasing the mortgage maximum to be eligible for interest deductions.
Reader Questions And Suggestions
Do you think the mortgage maximum for interest deduction will be increased in the future? What are some other ways the federal government can make housing more affordable?
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Thanks for the simple and easy to follow explanation. I had looked several times but was not certain of the 750K rule.
One question, do you know if a home improvement or equity loan can also be included in this calculation? I have two loans that have a higher rate, and if it applies as a cost benefit I want to add them as well.
Thanks!
If your loan balance is over the limit, and fixed, the math is really easy.
750k x 3% = $22,500 in allowable mortgage interest. Bear in mind that states like CA still permit the deduction on 1M, so it’s 30k for the 540 form.
Are buy down points tax deductible as well? Thanks
Not unless you align with the 9 new rules that were set in 2022 which eliminated the majority of opportunity to claim buy down interest.
I have a $1 million mortgage at 5.25% in an VHCOL and was wondering if it was worth prepaying a 250k lump sum so I can deduct the full 750k and recast the loan so I can also reduce my monthly payments. I do expect to have a bonus and income for the foreseeable future. I don’t expect refinancing to be viable for some time with rates this high.
$750K out of your $1 million mortgage balance is eligible to be written off. I would rather keep the $250K liquidity in Treasury bonds yielding 5%+.
Sam, I have another question related to this and always wondered: is the Mortgage interest deduction tied to the mortgage interest rate? For example if one person has a $750,000 mortgage amount with a 6% annual interest rate and the other has a $750,000 with a 3% interest rate, does the person with the 6% interest rate get to claim more in mortgage interest deduction?
Also just confirming that if you take the standard deduction then you don’t get the mortgage interest deduction separately or on top of standard deduction? This really would seem to minimize the entire benefit…
Yes and yes!
But there is the SALT cap deduction limit as well.
Student loan interest is not a Schedule A itemized deduction. It’s a Schedule 1 adjustment to income (line 21 in 2022). It’s available even if you take the standard deduction.
“Does the government really want to worsen housing affordability and create a larger nation of renters?”
Isn’t that what the Fed has been doing by raising interest rates?
The mortgage reduction to 750K does not have an expiration in ‘25 like the SALT cap deduction cap of 10K? You think the SALT cap will be extended or lifted? For those with large down payment, a uncapped SALT deduction is probably more meaningful over time, no? I think it’s hard to reverse when the other 50% of the country isn’t impacted like the 50% living in expensive coastal cities.
Yes, I think the $10K SALT cap will be lifted. My hope is politicians will want the support of the half of the population negatively impacted.
No chance. It’s a killer how much my tax liabilities went up with this.
Try key word is “earned” income. The top 5% get most of their income that is either taxed at a lower tax rate or tax deferred in irrevocable trusts.
Maybe the top 1% and definitely the top 0.1%. Not so much the top 5%.
Wish they would repeal the SALT limitation!
Ah thanks for the example. That helps a lot. I’ve always found this very confusing after they changed the rules.
It’d be nice if they raise the limit but what I hope more is that they renew the estate tax limit when it expires. I don’t know the details of what’s supposed to happen when it expires but I feel like it could go down to something very low. Will just have to wait and see.
Should provide a price bump for coastal city real estate if so.