Your guide to mortgage tax deductions for 2021
It’s time to start filing your 2021 taxes. And many homeowners will be wondering about mortgage tax deductions.
Generally, you can only deduct certain mortgage costs – and only if you itemize your deductions. If you take the standard deduction, you can ignore the rest of this information as it will not apply.
So which mortgage costs are tax deductible and which are not? Here’s what you need to know.
To note: We only explore federal tax deductions for the 2021 tax year, filed in 2022. Those for state taxes will vary. This article is for general information purposes only. The Mortgage Reports is not a tax website. Check the relevant Internal Revenue Service (IRS) rules with a qualified tax professional to make sure they apply to your personal situation.
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How mortgage tax deductions work
Before you worry too much about making mortgage tax deductions, let’s make sure they apply to you.
As mentioned above, mortgage expenses are only tax deductible if you choose to itemize your deductions. If you take the standard deduction, they will not apply.
In the 2018 tax year, only 11.4% of individual taxpayers made itemized deductions under the IRS. The others preferred to make the standard deduction.
Flat-rate deduction for taxes 2021
If you take the standard deduction, you cannot itemize any other deductions, including those related to your mortgage. So nothing in this article applies to you.
For 2021 tax returns, the government has raised the standard deduction at:
- Single or married declaring separately — $12,550
- Married declaring jointly or qualified widow(er) — $25,100
- head of household — $18,800
If your deductible items don’t total more than that, it’s usually best to take the standard deduction.
Mortgage interest tax deductions
So you plan to itemize your deductions for the 2021 tax year. What does this mean for your mortgage tax deductions?
Your biggest tax break should come from the mortgage interest you pay. It’s not your full monthly payment. The amount you pay for your loan principal is not deductible. Only the interest portion of your payment is.
Depending on the amount of your mortgage, you may encounter a cap on the interest you can deduct.
If your mortgage was in place on December 14, 2017, you can deduct interest on debt up to $1 million ($500,000 each, if you’re married and file separate returns). But if you took out your mortgage after that date, the limit is $750,000.
To be clear, if your mortgage is over $1 million or $750,000, as the case may be, you can still deduct interest. But only for interest paid on a loan amount up to these limits.
Tax deductions for private mortgage insurance
According to IRS Publication 936, “You can treat amounts you paid in 2021 for qualifying mortgage insurance as mortgage interest. The insurance must be linked to a debt for the acquisition of a home and the insurance contract must have been issued after 2006.
This means you can deduct mortgage insurance paid throughout the year, but only if the loan was used to buy your home.
However, there is an income cap.
If your adjusted gross income (AGI) is less than $100,000 ($50,000 if you’re married and filing separately), you can fully deduct your mortgage insurance premiums. But if your AGI is $109,000 ($54,500 if you’re married and filing separately) or more, you can’t deduct any. Between $100,000 and $109,000, the proportion you can deduct gradually decreases.
Don’t bank on the possibility of deducting mortgage insurance premiums in future years. It was supposed to have been abolished years ago. But Congress continues to renew it year after year. And, one day, it may not be.
Closing Cost Tax Deductions
Only a few closing costs are deductible. These are usually:
- Property taxes paid in advance at closing
- Redemption points — See below
- Prepaid interest — The interest you pay for the remainder of the month in which you close
- Origination fee — The amount charged by your lender for processing your application
- Mortgage insurance premiums — In certain circumstances. See above
No other closing costs (home appraisal, inspection, escrow fees, title insurance, etc.) are generally deductible.
Second home tax deductions
You can make mortgage interest deductions on a second home (perhaps a vacation home) as well as your primary residence. But the mortgage or mortgages must have been used to “purchase, build or substantially improve” the property, under the terms of turbotax. And there is a limit of two houses; you cannot deduct interest on three or more.
If that second home is owned by your son, daughter, or parents and you’re paying the mortgage to help, you can only deduct the interest if you co-signed the loan.
Second mortgage tax deductions
You may be able to deduct interest on a second mortgage, usually a home equity loan or home equity line of credit (HELOC). But, since 2018, you can only do this if you used the money to buy, build, or substantially improve your primary or secondary residence. Older loans have no such rule.
Again, there is a cap. You can only deduct interest on the first $100,000 of the value of your second mortgage.
Refinance tax deductions
A “rate and term refinance” is a refinance in which your new mortgage balance is effectively the same as your old one. Rate and term refinancing should not generate new tax deductions.
However, a cash refinance can turn things around.
You can still deduct interest on the original balance of your mortgage. But you can only deduct interest on the withdrawal amount if it was used to buy, build, or substantially improve your primary or secondary residence.
You will therefore not be able to deduct interest on money that you have used for other purposes, such as debt consolidation, a family wedding, vacations, etc.
The good news is that you don’t have to pay tax on the funds received from the cash-out refinance. It is a loan that must be repaid with interest. It is therefore not taxable income.
Rebate point tax deductions
Rebate points (aka “mortgage points”) allow you to buy yourself a lower mortgage rate by paying a lump sum at closing. Previously, you could deduct the cost of the discount points at the end of the tax year in which you paid the lump sum. But not more.
Now you can still deduct cash back points, but only pro-rated over the life of your loan.
For example, if you have a 30-year mortgage, you deduct one-thirtieth of the lump sum each year. With a 15-year loan, you deduct one-fifteenth.
If you refinance with a different lender during the life of the mortgage, you can deduct any remaining point costs that year. But if you refinance with the same lender, you continue as before.
Mortgage Tax Deduction FAQs
You cannot deduct your full monthly payment. But you can deduct the part that goes to interest. At the start of your loan, a large portion of each monthly payment is made up of interest. In the end, almost nothing is. The portion decreases steadily over the life of your mortgage. Again, you can only make this deduction if you itemize your deductions.
Yes. But not as a lump sum. With a 30-year mortgage, you deduct one-thirtieth of the cost of the points each year. With a 15-year loan, you deduct one-fifteenth. etc
Yes, for the 2021 tax year, provided your adjusted gross income (AGI) is less than $100,000 ($50,000 if married and filing separately). Above $109,000 ($54,500 if you are married and filing separately), you cannot make any deduction for mortgage insurance. Between these two incomes, you can gradually deduct less for each additional $1,000 you earn.
You do not pay tax on the amount you withdraw. It is a loan like any other and these are not taxable as income. But you may be able to deduct interest paid on the withdrawal amount if the money was used to buy, build, or significantly improve your primary or secondary residence.
Again, interest on home equity loans is generally not tax deductible. But it should be if you used your loan proceeds to buy, build, or substantially improve your primary or secondary residence.
A HELOC is a second mortgage, just like a home equity loan. And the rules are the same. Namely, you can only deduct interest if you used the proceeds of your loan to buy, build or substantially improve your primary or secondary residence.
Some may be. But it’s a short list that mostly involves small amounts. However, you can deduct origination fees from your lender (even if your lender paid them for you), which may be worth it. See above for the full list. Other than that, you can’t deduct most expensive items, such as appraisal fees, inspection fees, title insurance fees, escrow fees, etc.
The bottom line
The bottom line is that mortgage expenses are only tax deductible if you itemize your taxes rather than taking the standard deduction. And even then, the rules can be complex.
The Mortgage Reports is not a tax website and this information is provided for general guidance only. Speak to a licensed tax professional about your situation before taking the next steps.
If you prefer, the IRS has an interactive online tax wizard (“Can I deduct my mortgage expenses?“) that might help you. And you can also download the IRS Publication 936 guide, “Mortgage interest deduction. For use in preparing 2021 returns” from its website.
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