iQuanti: As tax season rolls around yet again, you may be thinking about ways to lower your taxable income and keep as much money as you can in your pocket. Tax deductions lower your overall taxable income and could end up moving you into a lower tax bracket. The most common deduction for homeowners is mortgage interest.
But how much do you need to pay your lender in a year to make the mortgage interest deduction worth it?
What are Tax Deductions?
There are two types of ways to take a tax deduction: standard and itemized. The standard deduction amount for the tax year 2021 is $12,550 for single filers, $25,100 for joint filers, and $18,800 for the head of household. The standard deduction simplifies the filing process as one lump sum is removed from taxable income.
Itemizing deductions involves tracking individual expenses throughout the year and totaling up eligible expenses to form the same lump sum, just with a bit more work. If you decide to itemize, you should anticipate the amount of your itemized deductions will be greater than the standard deduction amount for your filing status.
Common tax deductions if you itemize include:
Medical and dental expenses (if more than 7.5% of adjusted gross income (AGI))
Student loan interest
Breaking Down the Mortgage Interest Deduction
Due to recent changes in tax law, the mortgage interest deduction limit was decreased from 100% of interest on loans up to $1 million to $750,000. The new lower mortgage deduction limit applies to homeowners who bought after December 15, 2017.
So, let’s talk about when taking the deduction is worth it.
As a single filer, you’d need to have paid mortgage interest greater than the standard deduction of $12,550.
Let’s say you’re currently paying interest on a mortgage at 3%. That means a mortgage of at least $418,334 you would be paying more in interest than the standard deduction ($418,334*.03 = $12,550.02).
So, a homeowner with a $500,000 mortgage at 3% would pay $15,000 in interest, therefore making it financially worth it to take the mortgage interest deduction.
A married couple filing jointly would need to pay more than $25,100 in interest in 2021 to make the mortgage interest deduction worth it. If the couple pays an interest rate of 4%, a mortgage larger than $627,500 will surpass that threshold ($627,500*.04=$25,100).
How to Claim the Mortgage Interest Deduction
The good news for homeowners is that mortgage lenders send a tax form 1098 that outlines exactly how much you’ve paid in interest during the prior tax year, so there’s no need to go back through your mortgage payments to break down what went toward interest vs. principal. Once you have this form, you can input the amount into your tax prep software or give it to your tax preparer.
If you paid a significant sum in mortgage interest, but it’s not quite over the standard deduction, you can also pair the amount with other deductions. For example, if you as a single filer have a $300,000 mortgage where you paid 3% interest for a total of $10,000, but you also donated $5,000 to charity, those two deductions together would put you over the threshold of the standard deduction.
The Bottom Line
When your mortgage interest for the tax year exceeds the standard deduction amount or mortgage interest plus other deductions together exceed the standard deduction, itemizing may be worth it. When in doubt, work with a tax professional who can guide you to make the most of your deductions, mortgage or otherwise
Source : https://www.newswire.com/news/how-much-home-do-you-need-to-make-the-mortgage-interest-deduction-21645555