Mortgage interest deduction: What to know, how to claim

The interest you pay on your mortgage could help you lower your taxes.

With the mortgage interest deduction (MID), you can write off a portion of the interest on your home loan, lowering your taxable income and potentially moving you into a lower tax bracket.

Here's what you need to know about the MID, including who is eligible to take it, how much you can claim and how to include it on your tax return.

The mortgage interest deduction allows you to deduct a portion of the interest on a mortgage for a primary or secondary home. You'll have to file an itemized return to claim the deduction and the loan must be a secured debt with your property as collateral.

In addition to private mortgages, the MID can be claimed on government-backed mortgages — like USDA, VA and FHA loans — and on interest on a refinanced mortgage.

You can also deduct mortgage points, prepayment penalties and late fees. If you want to claim the deduction for a home equity loan or HELOC, the funds must have been used to "buy, build, or substantially improve" the property.

You can deduct the interest you paid on the first $750,000 of your mortgage. For married couples filing separately, the limit is $375,000,

If you took out your mortgage between Oct. 13, 1987, and Dec. 16, 2017, you can deduct the interest on the first $1 million (or $500,000 for couples filing separately). There is no cap for mortgages taken out before Oct. 13, 1987.

The maximum deduction includes the total amount of loans on your primary and secondary residences.

The Tax Cuts and Jobs Act of 2017 nearly doubled the standard deduction, from $6,500 to $12,000 for individual filers, from $13,000 to $24,000 for joint filers and from $9,550 to $18,000 for heads of household.

As a result, the number of taxpayers who choose to itemize their returns and claim the MID has declined precipitously.

To see if it's worth it for you, add up the interest you paid on your mortgage last year, along with any other deductions you plan to take. If the total is more than the standard deduction, it's probably worth the effort of itemizing.

You can use TurboTax to deduct mortgage interest and property taxes, claim expenses related to selling your home and take advantage of other homeowner tax breaks. There are tiers with tax pros who can offer advice or even do your return for you from start to finish.

You can use TaxSlayer's free tier to claim the mortgage interest deduction, although the paid options have additional perks: The self-employed tier is great for freelancers and gig workers, for example, and includes support from a tax expert with self-employment expertise. It also comes with audit defense and reminders to pay quarterly taxes.

If you paid more than $600 in interest last year, your mortgage provider should send you a completed Form 1098 to fill out the Itemized Deduction List on Form 1040-Schedule A.

Interest on timeshares, rentals, home offices and other properties can qualify for the deduction in some cases, but it may require additional tax forms. Consult IRS Publication 936 for more information.

If you want to save money next year, refinancing your mortgage could reduce the interest you'll have to pay.

Qualified borrowers with a Freddie Mac or Fannie Mae mortgage can refinance with Freddie Mac's ReFi Possible and Fannie Mae's ReFi Now, guaranteeing a rate drop of at least 0.50% and decreasing your monthly payments.

PNC Bank and Rocket Mortgage offer refi options and are standouts for customer service and online offerings.

There are several other deductions to consider if you're a homeowner.

Discount points

If you buy down your mortgage rate with discount points, you may be able to deduct the cost as a kind of mortgage interest.

Discount points are fully deductible the year you pay them if they're used for your primary residence and they're calculated as a percentage of the principal mortgage amount. The IRS has information on additional criteria for deducting discount points.

Property taxes

Homeowners can deduct state or local property taxes up to $10,000 (or 5,000 if married filing separately). You can also deduct state and county taxes for the maintenance or repair of streets, sidewalks, sewer lines and other local benefit taxes.

Home equity loans 

If you took out a HELOC or a home equity loan for a home improvement project, you can deduct interest paid on it as part of a mortgage interest deduction.

Home improvements

You can deduct the value of certain home improvements from your tax return, notably accessibility upgrades like adding ramps, handrails and stair lifts. In addition, energy-efficient improvements on a primary residence may qualify for a tax credit worth up to $3,200.

The credit equals 30% of qualified expenses, which include the purchase of solar water heaters and geothermal heat pumps, and the cost of home energy audits performed by a qualified home energy auditor. 

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