How to Calculate Interest on a Mortgage Loan for Tax Purposes
Your mortgage lender has to send you a Form 1098 at the conclusion of every year that shows how much interest you paid on your mortgage loan during the year. However, if you intend to claim the mortgage interest deduction, you may have to further calculate how much of that interest can be deducted on your income taxes. As of 2011, you can deduct the interest on an average mortgage balance of up to $1 million. In the event that you and your spouse file separate returns, you can each deduct the interest on an average mortgage balance of up to $500,000.
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Instructions
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Compute the average mortgage balance to figure if you are over the limit for your filing status. If you did not borrow any additional amounts during the year, did not prepay more than one month’s principal and made level payments at set intervals, such as monthly payments, you can simply average the beginning balance and the ending balance. If you fail to satisfy even one of the requirements, you have to divide the interest paid by your lowest interest rate for the year to compute the average mortgage balance.
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Compare the balance to the limit for your filing status. If your average balance falls below the limit, all of the interest on your mortgage loan is deductible for tax purposes. However, if your average mortgage loan balance falls above the limit, you have to calculate the portion of your interest on the mortgage loan you can deduct for tax purposes. For example, if you are single and your average balance equals $2.6 million, your average balance exceeds the $1 million limit.
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Divide your mortgage balance limit by the average mortgage balance. This result tells you the portion of your mortgage loan interest you can deduct. In this example, divide $1 million by $2.6 million to get 0.38461538462.
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Multiply the portion of your mortgage loan interest you can deduct by the total interest paid to calculate the amount of your interest you can deduct for tax purposes. Finishing this example, if you paid $234,000 in interest, multiply $234,000 by 0.38461538462 to find you can deduct $90,000.
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