Although filing taxes isn't much fun, the hours spent filling out forms could bring financial rewards for homeowners. This is because, as a property owner, you can deduct money paid towards mortgage interest from your income, meaning you'll pay less tax.
Established in the original tax code, the mortgage interest deduction is seen as a way to incentivize people to purchase instead of rent homes. To take advantage of this, you will need to itemize your deductions rather than taking a standard deduction. The current thresholds for taking itemized deductions are $6,300 for single taxpayers and $12,600 for those who are married. To take advantage of the mortgage interest deduction, your total itemized amounts need to be greater than these thresholds, which is quite easy if you're paying a mortgage. Mortgage insurance premiums also qualify under the mortgage interest deduction through tax year 2017, but they are subject to phase-out beginning at $100,000 AGI (for married filing jointly status).
At the outset of a mortgage, when most repayments go towards the interest, the mortgage interest deduction can be especially large and make all the difference you need to be able to itemize your deductions. For example, a couple in the 28 percent tax bracket with combined earnings between $151,201 and $230,450 per year, who bought their property using a 30-year mortgage of $300,000 with a fixed rate of 4 percent, would pay $11,904 in mortgage interest during the first year. When combined with other itemized federal deductions, this will exceed the $12,600 threshold. By taking the mortgage interest tax deduction, this couple could save $3,333 on their taxes in the first year. Such a savings amount will decline over the lifetime of the loan, due to lower interest payments.
If you're paying down a mortgage, taking the mortgage interest tax deduction could save you a tidy sum, so seek advice as we head into the next tax return season.
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