Is mortgage interest tax deductible?

The short answer is “yes”, mortgage interest is tax deductible from your total taxable income, but only if the mortgage interest and other itemized deductions go higher than the standard deduction on your federal income tax form. Confused? Let me explain better.

The standard deduction for couples for 2013 on federal forms was 12,200 or 6,100 for single filers. So, for instance if you had no other deductions to add to your itemized deductions form (or forms), you would have to have over 12,200 or 6,100 in mortgage interest to even begin to deduct your mortgage interest from your taxable income. However, many people have other things they can deduct that add to their itemized deductions that will get them higher than the standard deduction. Did you give to charity? Great, you can add that to your itemized deductions list. Property taxes, continuing education credit, job related expenses, and other itemized deductions also might make it worth it to itemize your deductions (including mortgage interest).

If however you have no other itemized deductions and your mortgage interest does not go above 12,200 or 6,100 (whether married or single), then you are not really going to be able to deduct your mortgage interest from your taxable income because taking the standard deduction will be better for you and save you more.

For instance, say you have 5,000 dollars in charitable contributions, 5,000 in mortgage interest, 5,000 in tools required for your job, and 5,000 in continuing education credits. That means you have 20,000 in itemized deductions and it is therefore in your best interest to itemize and use your mortgage interest to get you above the standard deduction (this would be beneficial whether you were married or single in this instance). If for instance you only had 5,000 in mortgage interest, 3,000 in property taxes, and 1,000 in charitable contributions, then that would only give you 9,000 in itemized deductions. This would be beneficial if you were single but not if you were married (12,200 versus 6,100 once again).

It pays to crunch the numbers and see if your mortgage interest and other numbers will put you over the standard deduction.

One of the ways that the government, since 1913, has encouraged home ownership is with the help of the mortgage interest tax deduction. This is an itemized deduction listed on Schedule A of your Form 1040. Beginning with homes bought or built after October 13, 1987, there are limits to how much you can deduct, as well as a phase out of the deduction.

Right now, you can only deduct your mortgage interest on debt up $1 million (total) on first and second homes for those who are married filing jointly. For those married filing separately and those filing single, the limit is $500,000. It’s also possible to deduct the interest on home equity loans of up to $100,000 ($50,000 for those not filing jointly).

On top of the debt limits associated with the mortgage interest tax deduction, there is also a phase out.   If you have an adjusted gross income of more than $166,800, your deduction will begin to phase out. For every $100 of income you have above the threshold, you lose $3 (or 3%) of your itemized deduction, multiplied by 33.3%. The maximum loss is 80% of your itemized deductions. If you make $266,800 a year, and pay $15,000 in mortgage interest, you are $100,000 over the threshold and your deduction will be reduced by $3,000 x 33.3%, or $999. Instead of deducting $15,000, you only deduct $14,001.

It’s important to note that there have been various proposals in the past to change the mortgage deduction. Indeed, the formula for figuring the deduction phase out has already been tinkered with in the past. Some suggestions include getting rid of the deduction for those above a certain income (such as $250,000), or eliminating the deduction altogether. While the issue is regularly debated by politicians, a USA Today and Gallup poll published in April 2011 indicates that 61% of Americans are against getting rid of the mortgage interest deduction – even though the Treasury Department believes it could save the government close to $100 billion in 2012.