20 Ways to Maximize Your Mortgage Interest Deduction
You can save money on your taxes by lowering your taxable income and taking advantage of the mortgage interest deduction. If you know what to do, you can get the most out of this valuable benefit and pay the least tax possible.
- Tricia Quitales
- 7 min read
Many people don’t fully take advantage of the mortgage interest deduction, which is one of the best tax breaks for homeowners. You can get the biggest tax break possible by following a few simple steps. This article discusses 20 ways to get the most out of your mortgage interest deduction. It gives advice on how to stay organized, refinance, and make extra payments. These ways can help you save a lot on taxes and keep more money in your pocket every year if you use it right.
1. Itemize Your Deductions
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You can’t just take the standard deduction to claim the mortgage interest deduction. You have to list each deduction separately. This lets you write off the interest you pay on your primary home and sometimes on a second one. To ensure you can itemize, keep careful records of all your expenses.
2. Use Your Home as a Primary Residence
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As long as your total debt doesn’t go over the IRS-set limit, you can deduct all of your mortgage interest on your main home. Ensure your home is listed as your primary residence to get the most out of this deduction. You may also be able to deduct interest on a second home, but there are stricter rules.
3. Refinance to Lower Interest Rates
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You can lower your interest rates by refinancing your mortgage. This means you pay more interest up front, which you can then deduct. Consider the costs of refinancing when you do it to make sure the tax savings are worth it. You can deduct more in the first few years of the loan if the interest rate is low.
4. Pay Your Mortgage Interest in Full
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Pay off your mortgage interest in full every year to get the most out of your tax break. Make sure you pay your mortgage interest on time every month because you can deduct it from your taxes in the year you pay it. If you miss payments or pay late, you might not be able to get as much interest.
5. Prepay Mortgage Interest
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Prepaying your mortgage interest could help you get the most out of your tax deduction for mortgage interest this year. You can lower your tax bill by more than the amount you pay in interest before the end of the year. Just keep in mind that some lenders might not accept early payments that are only for interest.
6. Consider a Home Equity Loan
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If the money from a home equity loan is used to improve the home that secured the loan, you can deduct the interest. This means that you might be able to borrow money against the value of your home to pay for repairs and still deduct the interest. You can deduct up to $100,000 in interest on home equity loans on your primary residence from your taxes.
7. Take Advantage of Mortgage Insurance Deductions
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You may be able to deduct the private mortgage insurance (PMI) you pay on a conventional loan as part of your mortgage-related costs. PMI deductions depend on your income, so if you make less than a certain amount, you might be able to get them. These loans are especially helpful for people who can’t put down 20% on a house.
8. Claim Mortgage Points
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When you pay mortgage points to lower your interest rate, you can deduct them in the year you make the payment. As part of your mortgage interest deduction, you can claim any points you paid when you got your mortgage. Most of the time, one point equals 1% of the loan amount.
9. Maximize the Deduction on a Second Home
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If you own a second home, you might also be able to deduct the mortgage interest on that home as long as you don’t rent it out for most of the year. The rules for second homes are similar to those for primary residences. The main difference is that there are extra rules for rental properties. Make sure that the second home is a “qualified residence.”
10. Use Your Mortgage for Home Improvements
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You might get more tax breaks if you use your mortgage to pay for home improvements. The IRS lets you write off mortgage interest on money used for home improvements, so improving your home with home equity can be a win-win situation for everyone. This method works best if the changes make your home more valuable.
11. Avoid Non-Deductible Interest
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You can’t deduct the interest you pay on loans for things like credit card debt or personal loans that aren’t qualified expenses. Ensure that the interest you pay on your mortgage or home equity loan is related to things you did to the house, like buying or fixing it up. Interest that you can’t deduct cuts down on your overall tax savings.
12. Track Your Home Office Deduction
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You can deduct some of your mortgage interest if you use a part of your home for business. The amount you can deduct depends on how big your home office is. This is true for primary and secondary homes, as long as the space is only used for business. With this plan, you can claim a portion of your mortgage interest, property taxes, and utilities.
13. Understand Interest Deduction Limits
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You can deduct much of your mortgage debt from your taxes. For most people, the most they can borrow for a mortgage after December 15, 2017, is $750,000. The most you can borrow for an older mortgage is $1,000,000.
14. Mortgage Deduction for Married Couples
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When married couples file their taxes together, they can deduct up to $500,000 in mortgage interest on their main and second homes. The amount you can claim is limited to $250,000 if you are married but file your taxes separately. Consider how your filing status affects the mortgage interest deduction to get the most out of your tax break.
15. Consider Loan Structure
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How much interest you can deduct depends on your mortgage setup. Interest on fixed-rate loans can be written off depending on the loan terms. On the other hand, interest on adjustable-rate mortgages (ARMs) may change. Know how the terms of your loan might affect your ability to deduct interest and your long-term tax plan.
16. Keep Records of All Payments
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To get the most out of your deduction, you need to stay organized and keep accurate records of all mortgage-related payments. This includes your monthly mortgage payment, interest payments, and any other costs connected to your loan. It will be easier to find and claim all of your tax-deductible costs if you keep good records.
17. Leverage a Reverse Mortgage
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With a reverse mortgage, you can turn the value of your home into cash if you are 62 or older. Like with a regular mortgage, the interest on a reverse mortgage can be written off as long as it is used for specific costs. This choice can help you get cash and save money on taxes at the same time.
18. Deduct Interest on Home Construction Loans
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Deducting the interest on a loan specifically used to build your home is possible. Construction loans are handled like regular mortgages as long as the home is built for personal use and not to sell. To ensure the interest is tax-deductible, ensure the building is for a qualified property.
19. Avoid Using Loan for Non-Qualified Expenses
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The interest deduction only applies to loans used for home-related purposes. If you use mortgage funds for things like vacations or personal loans that aren’t related to your home, you might be unable to deduct the interest. To keep the interest deduction, ensure the loan terms are only used for buying, building, or improving the home. This plan will help you avoid deductions that aren’t allowed.
20. Consult a Tax Professional
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A tax expert can help you understand all the deductions you can take and advise you on how to get the most out of your mortgage interest deduction. Since tax laws are always changing, having a professional look over your case makes sure you’re taking full advantage of all the chances that come your way. Getting help from a professional can save you time, effort, and money and help you avoid making mistakes.