Things You'll Need:
- Calculator or spreadsheet
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Step 1
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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Step 2
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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Step 3
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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Step 4
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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Step 5
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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Step 6
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.
