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. Use our Mortgage Tax Deduction Calculator to determine the mortgage tax deduction benefit based on mortgage type, loan amount, mortgage rate, property tax rate and your federal tax bracket.
Your interest rate is an important factor in calculating your mortgage tax benefit because only your interest expense is tax deductible and not your principal repayment, which means you cannot deduct the full amount of your mortgage payment. Your loan term is another significant input because amortization -- the split between principal and interest payments -- varies depending on the length of your loan. The longer your mortgage term, the greater your total mortgage tax deduction benefit.
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. Your income tax bracket and property tax rate also impact your mortgage tax benefit, with the higher your personal and property tax rate, the higher your tax deduction.
You can input your information for property value, loan amount, mortgage rate, tax rates, loan program and length into the calculator to determine your total mortgage tax deduction and average monthly tax benefit in the first year of your loan as well as the estimated total tax benefit over the life of your mortgage. The calculator also shows you your monthly mortgage payment, total monthly housing expense including estimated property tax and insurance and your monthly housing expense less the average monthly mortgage tax deduction. This enables you to understand how the tax benefit helps to offset your mortgage payment and total housing expense, making it more affordable to own a home. It is important to highlight that although the deduction reduces the taxes you owe and may allow you to qualify for a tax refund, you do not receive a direct payment from the government for the benefit.
Please note that if your mortgage closed on or after December 15th, 2017 the mortgage tax deduction is limited to $750,000 in mortgage amount. If your mortgage closed before December 15th, 2017 the mortgage tax deduction is limited to $1,000,000 in mortgage amount. Additionally, the total deduction for state and local taxes (SALT), including property tax, is capped at $10,000 and our calculator limits the property tax deduction to $10,000.
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What You Should Know About the Mortgage Tax Deduction Benefit
How Much of Your Mortgage is Tax Deductible?
If your mortgage closed on or after December 15th 2017 the mortgage tax deduction is limited to $750,000 in loan amount. If your mortgage closed before December 15th, 2017 the mortgage tax deduction is limited to $1,000,000 in mortgage amount. For example, if you take out a $900,000 mortgage to buy a home in 2018, you can only deduct the interest expense on $750,000 of the loan amount. Please note there are certain exceptions to the $750,000 limit for refinances of mortgages that closed prior to December 15, 2017 and purchase mortgages on homes that were under written contract prior to December 15, 2017. Borrowers are also allowed to deduct $10,000 in combined state and local taxes including income and property taxes. Our Mortgage Tax Deduction Calculator factors in your interest expense and property tax payments. Mortgage points and mortgage insurance costs, such as PMI and FHA MIP, are also tax deductible according to the federal tax code. 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. Use our Mortgage Tax Deduction Calculator to understand how the tax benefits offsets total monthly housing expense including your loan payment, property taxes and insurance.
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. Our Mortgage Tax Deduction Calculator shows your tax benefit in the first year of your mortgage as well as your total benefit over the life of your loan.
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.
You Must Itemize Your Taxes to Claim the Mortgage Interest Deduction
When in Doubt, Consult a Tax Professional
Borrowers should consult a tax professional to determine the mortgage tax deductions they qualify for.
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Knowing how amortization works enables you to understand how the mortgage tax deduction benefit changes as the amount of interest you pay over the course of loan changes
Mortgage Tax Deduction: https://www.irs.gov/newsroom/interest-on-home-equity-loans-often-still-deductible-under-new-law