Can You Deduct Mortgage Interest on State Income Tax?
Deducting mortgage interest on tax returns is an incentive given to homeowners as a tax relief. Often this deduction can be substantial and offset a significant portion of the taxes you owe. While it's a common misconception that mortgage fees and interest cannot be deducted on state returns, mortgage interest, points and closing costs can be deducted on both federal and state tax returns.
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Deduction
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The amount of the deduction you can take on your state income taxes depends on the amount of mortgage interest, origination fees and closing costs you paid. You must itemize your deductions on Schedule A, which is filed with your 1040 for federal income taxes. Make sure the total of the itemized deductions exceeds the standard deduction.
State Forms
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State forms vary, but when filing for a deduction on your state taxes, simply include a copy of your Schedule A from your federal return. The amount that you'll enter on Schedule A can be found on Form 1098, which is sent to you by your lender each year.
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Mortgage Credit Certificate
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Some states distribute MCCs (mortgage credit certificates) to homeowners who have low to moderate incomes. This certificate entitles you to a federal tax credit of up to 20 percent of your annual mortgage interest. However, this credit does not affect your state taxes.
Benefits
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The benefit of state deductions is simply less tax liability. It's not a refund or a tax credit that directly reduces the amount of tax you owe, but a deduction, which decreases the income on which you are taxed. This ultimately leads to a larger return, because you are likely to have paid too much in taxes after decreasing your liability.
Warning
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You might want to speak with a tax professional before itemizing deductions. Form 1040 and Schedule A are both required for full itemization, and the details are important. An accountant can walk you through the difference between taking the standard deductions and itemizing your deductions and explain what is deductible and what is not.
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