Mortgage Interest Tax Deduction Formula

If you itemize, you must use form 1040 to file your taxes.

As a homeowner, the Internal Revenue Service permits you to deduct some or all of your mortgage interest from your income taxes. In order to claim the deduction, you must itemize your deductions using Schedule A.

Size Limits

You can deduct the interest on the first $1 million of your mortgage ($500,000 if married filing separately). If your mortgage exceeds the size limit, you can figure out how much you can deduct for mortgage interest by dividing the limit by your average mortgage balance and multiplying the result by the total interest paid. For example, if you had a $1.25 million mortgage, paid $100,000 in interest and you were single, you would divide $1 million by $1.25 million to get 0.8 and then multiply 0.8 by $100,000 to find you could deduct $80,000.

Reporting

Your financial institution will send you a form 1098 that will document how much you paid in mortgage interest at the end of the year. Your mortgage interest total will be found in box 1.

Significance

You can calculate how much the mortgage interest tax deduction will save you on your income taxes by multiplying your marginal income tax rate by the amount you can deduct. Your marginal income tax rate is the highest tax bracket you fall into. For example, if you fall in the 28 percent tax bracket and can deduct $8,000 of mortgage interest, you would multiply 0.28 by $8,000 to find you would save $2,240.

References

• IRS: Publication 936
• Investopedia: The Mortgage Interest Tax Deduction

Resources

• IRS: Form 1098
• IRS: Schedule A