Mortgage Tax Deduction Calculator
Use our Mortgage Tax Deduction Calculator to determine your mortgage tax benefit based on your loan amount, interest rate and tax bracket. 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.
How Our Mortgage Tax Deduction Calculator Works
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 calculator to determine your mortgage tax deduction and how this benefit makes owning a home more affordable. The mortgage tax benefit varies based on numerous factors including the following inputs:
Property Purchase Price. Property taxes are based on your property value which is initially determined by the price you paid for your home. The higher the property purchase price, the higher your property taxes.
Mortgage Amount. Your interest expense is directly related your loan amount. The higher your loan amount, the higher your interest expense and greater your mortgage tax deduction.
Mortgage Type. Your interest cost also varies depending on your mortgage type. Only a portion of the monthly payment for a fixed rate mortgage is interest and therefore tax deductible while the entire payment for an interest only mortgage is comprised of interest and fully tax deductible, subject to limits on your loan amount.
Interest Rate. 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. The higher your interest rate, the greater your tax benefit.
Loan Term. Your mortgage 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 a fixed rate mortgage.
Federal Tax Bracket. Your income tax bracket also impacts your mortgage tax benefit, with the higher your personal tax rate, the higher your deduction.
Property Tax Rate. The higher your property tax rate, the higher your taxes and greater the tax deduction benefit. Please note that the total deduction for state and local taxes (SALT), including income and property taxes, is capped at $10,000 and our calculator limits the property tax deduction to $10,000.
Our calculator enables you to understand the following information about your mortgage tax deduction:
Year One Mortgage and Property Tax Deduction Benefit. This shows you the total tax benefit you realize in the first year of owning a home. Your mortgage tax benefit is usually the highest in year one of owning a home because your pay the most interest expense while the property tax benefit usually increases over time, subject to certain limits, as your property value appreciates.
Year One Average Monthly Tax Benefit. This shows you your average tax benefit on a monthly basis the first year you own a home. For example, if your total tax benefit for the year is $12,000, then your average monthly benefit is $1,000. You can use this information for financial planning purposes.
Year One Monthly Housing Expense Less Monthly Tax Benefit. This enables you to understand how the tax benefit helps to offset your total housing expense, making it more affordable to own a home.
Total Tax Deduction Benefit over the Life of the Mortgage. This shows you your estimated total tax benefit over your entire mortgage. Because the tax deduction changes over the course of your loan it is helpful to understand the total value of the benefit. The longer your mortgage, the higher the total tax benefit.
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.
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
In order to benefit from the mortgage tax deduction you are required to itemize your taxes which requires extra time and effort as compared to taking the standard deductions. We recommend that you work with a tax specialist to determine if your interest and property tax deductions are large enough to justify itemizing your taxes.
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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Sources
"Interest on Home Equity Loans Often Still Deductible Under New Law." IRS. Internal Revenue Service, February 21 2018. Web.