Homeowner Tax Tip #3: Deducting Mortgage Interest
The most substantial tax deduction for many homeowners is the mortgage interest deduction. Mortgage interest on a primary residence (in addition to second residences) is usually tax-deductible (but not necessarily for Alternative Minimum Tax or AMT) for mortgage balances up to $1 million ($500,000 if married filing separately). You are also entitled to deduct interest on additional home equity indebtedness of up to $100,000. That means that in addition to the $1 million acquisition cost, you can borrow up to another $100,000 of the equity in your home. This is a change from the pre-1986 tax rule that limited your equity borrowing beyond the purchase price to certain qualified expenses, such as home improvements, medical, and education expenses.
If a mortgage was originally considered to be entirely acquisition indebtedness, then any refinance of that mortgage will continue to be considered acquisition indebtedness, but only to the extent of the original mortgage. Any additional indebtedness, if not specifically used to substantially improve the residence, will be considered home equity indebtedness, subject to the $100,000 limit for regular tax purposes.
Late payment charges may also be deducted as home mortgage interest if not for a specific service received in connection with your home loan. The same is true for mortgage prepayment penalties. If you pay off your mortgage early and incur a prepayment penalty, you can deduct that penalty as home mortgage interest (subject to the same requirements for late payments).
Acquisition and home equity indebtedness must be secured by a qualified residence. If your adjusted gross income is higher than a certain level, your deductions may be limited.
The following white paper outlines a series of tax laws in regards to homeownership: http://www.dh-cpa.com/client_media/files/pdf/2015RefNL_TaxTipsHomeowner.pdf
Need help analyzing what tax breaks you may be eligible for? Davis and Hodgdon Associates CPAs has been assiting nonprofits, individuals and businesses with tax and accounting services in the Burlington Vermont Metro area for more than 20 years. If you have any questions or concerns please feel free to call 802.878.1963 or email [email protected].