How to Calculate Mortgage Interest Taxes
One of the perks to having a mortgage is the tax-deductible interest expense. Along with your other itemized deductions, mortgage interest can be deducted from income. You should receive a Form 1098-INT from your bank, which will have mortgage interest tax information detailed for you. However, it is also important to be able to verify this information for yourself. This article will show you how to calculate the amount of tax-deductible mortgage interest and provide an online calculator to assist.
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Instructions
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Determine if you qualify for the mortgage interest tax deduction. You must be liable for the mortgage which means you cannot deduct payments for paying on someone else's loan. According to the IRS Publication 936, this option also only applies to "qualified homes," that is the home you live in or your second home (see Resources). Investor properties have a different set of rules and you should consult a tax professional to optimize the amount you deduct.
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Answer the questions in Figure A (page three) of Publication 936. It will help you to figure out if your mortgage interest is fully deductible through a decision tree. Also answer the questions on Figure B to determine if your interest is fully deductible in the current year.
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Calculate the total interest on the principal you owe. Let's use $200,000 as an example, with an interest rate at 5 percent over a 30-year period. Take the total principal amount, multiply by the interest rate and divide by 12 months. The calculation should look like this: 200,000*(0.05/12). This equals $833.33 and this represents the interest you owe for one monthly payment.
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Calculate the new principal amount for each month in the year. If your monthly payment is $1,200, deduct $1,200 from $200,000 (the principal payment) and add back the interest as calculated above. The calculation should look like this: $200,000 "principal" - $1,200 "mortgage payment" + [$200,000 "principal" x (.05 % "interest"/12 "periods")] or $199,633.33. This is your new principal. Remember the principal is dynamic and changes with each payment.
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Sum the interest for each payment in the year. This is the amount of interest that should match Box 1 on your Form 1098-INT. This amount can, and should, include all credit card, home equity loans and lines of credit that are backed by "qualified property." You may receive multiple 1098-INT forms depending on the number of loans you are paying interest on for the property.
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Use an online mortgage interest deduction calculator to further verify your calculation. See Resources for a link to Bankrate.com's calculator. You will need the same data used to calculate the mortgage interest tax above.
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Tips & Warnings
If you have a home office, the procedure is slightly different. See Publication 587, "Business Use of Your Home," for details. It explains how to determine the amount to deduct for your business which includes the part of your home mortgage interest allocated to your business. If you need additional information or help with filling out Form 1040 (Schedule B), you can call the IRS at (866) 455-7438 or (304) 263-8700.
This is not to be construed as tax or legal advice.
