Over 51 million Americans currently have a mortgage. This means that if you're considering a mortgage or already have one and want to know the latest changes regarding mortgage interest deductions in 2023, then you’re likely, not alone.

In this comprehensive guide, we'll walk you through every step in understanding mortgage interest deductions for 2023 — from eligibility requirements to maximizing your returns. 

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What Is Mortgage Tax Deduction?

The mortgage tax deduction is one of the best tax breaks for homeowners. It allows those who itemize their taxes to deduct mortgage interest paid on the first $750,000 of mortgage debt. This applies to homes bought before December 2017 (as it was part of the 2017 Tax Cuts and Jobs Act).

This means every mortgage payment you make will be eligible for a tax deduction as long as it’s itemized, which can make home ownership more financially viable during tax time each year. Do you have to itemize those interest payments? Yep, but with the right accountant that shouldn’t be too difficult.

The bottom line? It's important to understand the mortgage interest deduction and how best to utilize it each tax season so you can take full advantage of your financial benefits as a homeowner.

Frequently Asked Question: How much mortgage interest can I deduct? Currently, you can deduct mortgage interest paid on the first $750,000 of mortgage debt.

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How Mortgage Interest Deduction Works in 2023

The mortgage interest deduction is a way to reduce your taxable income. Essentially, the money you pay towards the interest of your home loan during a tax year can help to decrease how much tax you owe. 

Usually, you are allowed to claim deductions on the first $750,000 of your mortgage debt for a main or second home (or $375,000 if you're married and filing separately). However, if you purchased your house before December 16th, 2017, then you can deduct the amount of interest paid during that year of up to $1 million (which was the previous limit before the 2017 Tax Cuts and Jobs Act). 

Ultimately, keeping good records is essential in making sure you get the most out of this deduction. If you pay your mortgage online and the itemized payment receipt you receive digitally includes the amount of interest paid with each payment, you should be fine.

Frequently Asked Question: How do I get a mortgage interest write-off? You’ll need to itemize your mortgage interest payments when you file your taxes. You’ll use Form 1098 for this (which we’ll explain in just a bit!).

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What Qualifies as Deductible Mortgage Interest?

Now, as you prepare your tax return, you might be thinking, “What qualifies as a deductible mortgage interest and how might that affect my tax deduction mortgage interest?” It’s a wise question to ask as not everything qualifies as deductible mortgage interest.

Here are seven types of mortgage loans and other types of loans that, if you pay interest on them, qualify for mortgage tax deductions. Because this isn’t a comprehensive list, it’s important to consult with a professional tax specialist if you have questions about your specific situation or your mortgage interest deduction limit.

• Main Home: Generally, regardless of how you use your main home, any interest you pay on the mortgage loan is deductible on your income tax return. However, there are some specifications, such as the fact that the home has to be collateral for the loan, it should be a home where people live (i.e. it should include sleeping and cooking facilities), and a few other requirements.
• Second Home: You can deduct interest paid on a second home as long as you don’t live there during the year. If you rent out a second home, you can deduct the mortgage interest if you lived there for longer than 14 days throughout the previous tax year (or for 10% of the days you rent it out; whichever is longer).
• Mortgage Points: Mortgage points are a type of prepaid interest on your mortgage loan. They can be used to reduce the amount of interest you pay over the life of the loan or you can choose to deduct them all at once if certain requirements are met. There are nine specific requirements for ensuring you are eligible to deduct mortgage points on your tax return that you can view here from the IRS.
• Late Payment Charges: Late payment charges can be a nuisance, but it turns out you may be able to deduct them from your taxes. If you have been charged for a late payment that was not for a specific service related to your mortgage loan, the IRS will allow you to deduct the charge from your taxes.
• Prepayment Penalties: Although it may come as a surprise to many homeowners, there can be a negative consequence of paying off your mortgage early: you may face a prepayment penalty. This penalty is charged by the lender if you decide to pay off the loan before it reaches its full term. But, there’s good news. You may deduct this one-time payment as part of your interest charges when doing your taxes.
• Home Equity Loan Interest: Finally, you can deduct the interest paid on a home equity loan from your taxes, but only if it's used to buy, build, or improve your residence. The IRS has strict regulations regarding how the loan is used; any funds spent outside of these three categories, such as to purchase a car or pay off credit card debt, are not eligible for deduction.

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What Doesn’t Qualify as Deductible Mortgage Interest?

As mentioned above, not everything qualifies as deductible mortgage interest. For example, the following types of payments don’t qualify:

• Home title insurance
• Regular homeowner’s insurance
• Principal mortgage payments
• Deposits or down payments
• Reverse mortgage interest
• Mortgage insurance

Frequently Asked Question: How can I increase my tax savings from mortgage interest? Make sure you know what qualifies as deductible mortgage interest first. Then, keep quality records of your payments throughout the year. Finally, seek the help of a qualified tax professional who can help you itemize your tax return properly if you’re unsure of how to do so.

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How to Claim Your Mortgage Tax Deductions Step by Step

Ready to start taking advantage of a tax deduction for mortgage interest? Follow these steps to ensure you’re maximizing your mortgage tax deductions.

Choose Standard or Itemized Deduction

If your mortgage interest payments don’t reach the standard deduction limit then you’ll likely be better off choosing the standard deduction. However, in most cases, most homeowners pay more than that limit in mortgage interest and therefore should itemize their refund.

For the 2023 tax year, the standard deductions are as follows:

• $12,950 for single filing status
• $25,900 for married, filing jointly
• $12,950 for married, filing separately
• $19,400 for heads of households

So, let’s say you’re filing as a single person. You paid $10,000 in mortgage interest payments, $2,000 in student loan interest, and $2,000 in charitable donations. In this case, it makes the most sense to take the itemized deduction as your total is $1,050 over the standard limit and will therefore help you lower your taxable income more.

Get Your 1098

Now, you’ll want to request Form 1098 from your mortgage loan provider. Form 1098 is an IRS form used to report the interest and mortgage insurance payments made on a mortgage loan for a given year. You can use Form 1098 to deduct the amount of those payments from your tax return if you qualify for the income tax deduction. 

To receive Form 1098 from your mortgage loan provider, you simply need to wait as they’re required to send one out to you at the beginning of each year. So, sit tight until about February. If you don’t receive one by mid-February, you will likely need to contact them directly and request it.

Use the Correct Tax Forms

Assuming you’ve decided to itemize your tax deductions, you’ll need to fill out Schedule A, which is also known as Form 1040. This tax form includes several deductions that taxpayers can take advantage of to lower their taxable income. These deductions can include items such as:

• Mortgage interest payments
• Charitable donations
• State and local taxes paid
• Business expenses

Form 1040 also allows you to deduct certain healthcare-related expenses from your total income. It's important to review all of the deductions available on Form 1040 to get the most out of your tax return and keep as much money in your pocket as possible.

Once you’ve filled everything out, you’ll submit the forms to the IRS and wait for your tax refund status. Typically, the quicker you file your taxes, the quicker you’ll get your refund.

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