Mortgage Tax Deduction Calculator
The ability to deduct mortgage interest expense and property taxes from your income when determining your federal tax bill is one of the main benefits of buying a home and having a mortgage. Calculate the mortgage tax deduction benefit based on mortgage type and amount, interest rate and your tax bracket. For fixed rate mortgages, the graph below the table shows how the annual and average monthly tax deduction benefit change as your interest expense goes down over the term of the mortgage
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What You Should Know About the Mortgage Tax Deduction Benefit
What Housing Expenses Are Tax Deductible?
Borrowers can deduct the interest expense on up to $1,000,000 in mortgages on a primary or second / vacation home. For example, if you have a $1,300,000 mortgage, interest expense on $1,000,000 of the loan is tax deductible while the interest expense on the remaining $300,000 of the loan is not tax deductible. Property taxes and mortgage insurance costs are also tax deductible according to the federal tax code. Additionally, the interest expense on a home equity loan or line of credit (HELOC) up to $100,000 is usually tax deductible and there are circumstances where the interest expense on home equity loans or HELOCs above $100,000 is also tax deductible. Borrowers should consult a tax professional to determine the mortgage tax deductions they qualify for.
How the Mortgage Tax Deduction Works
An income tax deduction does not directly reduce the amount of taxes you owe the government on a dollar-for-dollar basis. Instead, a tax deduction reduces the gross income figure used to calculate how much income tax you owe. For example, if you spend $20,000 on mortgage interest, your tax bill is not reduced by $20,000. Instead, the gross income figure used to calculate your tax bill is reduced by $20,000 which means you pay less taxes, just not on a dollar-for-dollar basis. The amount by which your tax bill is reduced depends on your income tax rate with the higher your tax rate, the greater your tax deduction and more money you save. It is also important to highlight that the mortgage tax deduction benefit does not result in borrowers receiving a monthly check or money from the government. Instead, as a result of the mortgage tax deduction borrowers pay lower income taxes or may receive a refund when they file their tax returns.
Your Mortgage Tax Deduction Changes Over the Course of Your Loan
Because of the way mortgage amortization works, you pay more interest expense at the beginning of your mortgage term than you do toward the end of your mortgage. Even though your mortgage payment may not change, the amount of interest you pay decreases a little with every payment and declines every year while the amount of principal you pay increases every year. Because your mortgage tax deduction is based on interest expense, your tax benefit gradually declines as you pay less interest over the course of your mortgage.
A Tax Credit is Different Than a Tax Deduction
In contrast to a tax deduction, a tax credit reduces the amount of taxes you owe on a dollar for dollar basis. Certain home buyer assistance programs, such as the Mortgage Credit Certificate (MCC) Program, provide low-to-moderate income borrowers a tax credit for a portion of their mortgage interest expense. The tax credit reduces your federal income tax bill on a dollar for dollar basis which makes it easier to qualify for a mortgage. For example, if your annual federal income taxes are $10,000 and you receive a $5,000 mortgage credit certificate, you only owe $5,000 in federal income taxes which means you can afford a larger mortgage.
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