You’re probably focused on stockings, Santa, and gifts right now, but the most wonderful time of the year is just around the corner: Tax season. This magical time is when Americans everywhere examine their finances and confirm whether they’re making the best possible choices for their fiscal well-being.
Until recently, the home mortgage interest deduction was a great choice that could help maximize your annual tax refund. But since the standard deduction was doubled seven years ago, the value of this tax strategy has diminished for most filers.
“With the standard deduction being higher these days, a lot of people won’t see the benefit. It’s like trying to squeeze water from a stone if you don’t have enough other deductions to make it worth itemizing,” said Arron Bennett, CFO and financial strategist at Bennett Financials.
Let’s take a closer look at when it makes sense to itemize deductions and take advantage of the home mortgage interest deduction, and when it just makes more sense to take the standard deduction.
Standard vs. itemized deductions: What’s the difference?
Taxpayers need to choose to either itemize all deductions or take the standard deduction—you can’t do both. If the amount of your standard deduction is greater than the sum of your itemized deductions, then you should most likely claim the standard deduction to minimize your tax bill.
The standard deduction rises almost every year, and it can vary depending on your tax filing status. For tax year 2024—return you will file in 2025—the standard deduction amounts are:
- Head of household: $21,900
- Single and married filing separately: $14,600
- Married filing jointly and qualifying surviving spouse: $29,200
The amount you get could be even higher under certain circumstances. For example, if you faced a “disaster loss” you might be able to claim that as an increase to your standard deduction.
The best way to determine whether you’ll be better off with the standard deduction vs. itemization is to speak with a tax professional, but there are a few key reasons you might not want to bother:
- If you already know your itemized deductions will not be greater than the standard deduction amount.
- Due to changes in legislation over the past decade, the actual tax savings with a mortgage interest deduction is far less than it used to be.
- Life is busy. For some people, the effort of tracking deductions isn’t worth the reward, especially if the difference would be negligible.
Limits on mortgage interest tax reductions
Until the past decade, the home mortgage interest rate deduction was one of the most common tax deductions American homeowners used to boost their refunds. Homeowners were allowed to deduct interest on mortgage balances of up to $1 million before the Tax Cuts and Jobs Act (TCJA) took effect in 2017.
But the TCJA also raised the standard deduction significantly, and the inversion has made this once-common deduction lose much of its appeal. The provisions of the 2017 reform are set to expire at the end of 2025, so the limits may revert back to these higher amounts unless the changes are extended or made permanent.
Most homeowners can deduct all of the eligible mortgage interest they pay if desired, but there could be limits based on when you took out your mortgage and how much you borrowed.
- If you took out your mortgage after December 15, 2017: You can generally deduct the interest you pay on up to $750,000 in combined debt that’s secured by your primary and secondary homes. Or, on up to $375,000 in combined debt if you’re married and file separately.
- If you took out a mortgage before December 16, 2017: You can still qualify for the higher $1 million or $500,000 limits even if you refinanced your mortgage. However, the limit only applies to the remaining principal balance that you refinance.
Say you got a $900,000 mortgage in 2016 and paid down the principal balance to $825,000 by early 2021. If you used a cash-out refinance in 2021 to get another $900,000 mortgage, you may be able to deduct the interest you pay on up to $825,000 in debt from your new mortgage—but not the additional $75,000 you got in cash.
- If you took out a mortgage before October 14, 1987: There’s no mortgage balance limit, but similar rules apply when you refinance the mortgage.
What to know if you’ve decided to itemize
Let’s say you decide that itemizing your deductions and choosing the home mortgage interest deduction is right for you. The only other requirement for eligibility is that your primary or secondary home is collateral for your mortgage. As long as that’s the case, and you’re not using some other form of collateral to secure the mortgage, you’re good to go.
Dennis Shirshikov, Professor of Finance, Economics, and Accounting at the City University of New York, recommends keeping good records if you choose this route. “Track everything—property taxes, PMI, and any home office expenses if applicable. Don’t forget about energy-efficient upgrades, which might qualify for tax credits. Being organized now saves a ton of headaches later,” said Shirshikov.
So long as you’re putting in the effort, you may want to take advantage of some other tax-saving opportunities:
- Interest on home equity loans and lines of credit (sometimes): You can deduct interest payments on home equity loans and lines of credit, but only when you use the money to buy, build, or substantially improve your home. Repairs and maintenance aren’t eligible, and the debt counts toward your combined mortgage balance limits.
- The cost of mortgage points: You’re prepaying interest when you buy mortgage points to lower your loan’s interest rate. You might be able to deduct the full amount the first year, or have to deduct it over the lifetime of the loan. The IRS’s flow chart can help you determine your options.
- Certain fees and penalties: Some expenses might qualify as home mortgage interest, including late payment charges and prepayment penalties.
On the flip side, there are plenty of restrictions on common interest and home-related expenses that you can’t deduct:
- Interest on reverse mortgages
- Lost earnest money deposits
- Closing costs, aside from eligible mortgage points
- Mortgage insurance, homeowners insurance, and title insurance premiums
- Interest on mortgages that aren’t secured by your primary or a secondary residence. There may be limitations or other tax deductions available if you rent out the home or own investment properties.
The takeaway
The home mortgage interest deduction can help cushion the financial impact of paying off your mortgage. However, the TCJA minimized the benefit for many homeowners by increasing the standard deduction and limiting itemizable deductions. Still, it’s worth seeing if you can lower your tax bill by claiming the deduction.
Tax software will generally walk you through the process, but hiring a tax professional could be a good idea if you have lots of questions or are a new homeowner. Low- and some middle-income households can also get free tax preparation and filing from IRS-certified volunteer tax preparers through the Volunteer Income Tax Assistance (VITA) and Tax Counseling for the Elderly (TCE) programs.
Louis DeNicola contributed to this article.
