How Much of My Mortgage Interest Will I Get Back on Income Taxes?
The mortgage interest tax deduction may save you a lot of money on your income taxes. Mortgage debt refers to the money you borrowed to buy, build or repair your house. In addition, the debt must be secured by your home. If these conditions are not met, you cannot claim the interest on your taxes as part of the mortgage interest deduction.
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Deduction Limits
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The IRS sets high limits on the amount of a mortgage for which you can deduct the interest on so that most people are unaffected. As of 2011, the limit equals the interest you pay on up to $1 million of mortgage debt. However, if you are married and file separate returns, each partner can deduct only the interest on $500,000 of mortgage debt. If your mortgage debt does not exceed the limits, you can deduct all the interest as part of your mortgage interest deduction.
Figuring Your Tax Savings
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The amount you can deduct does not change depending on your income tax bracket, but the amount of money you will save on your income taxes does change. For example, if you pay $10,000 in mortgage interest, your deduction amount equals $10,000, whether you have $500,000 in taxable income or $25,000 in taxable income. However, that $10,000 deduction result in you getting more money back from your income taxes if you have $500,000 in taxable income because you fall in a higher income tax bracket. To figure your tax savings, multiply your tax rate by your mortgage interest deduction. For example, if you fall in the 34 percent tax bracket and have a $10,000 mortgage interest deduction, multiply $10,000 by 0.34 to find you would save $3,400.
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Must Itemize to Get Deduction
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The mortgage interest you pay during the year can only be deducted from your income taxes if you elect to itemize your deductions. When you file your income taxes, you can choose to claim either the standard deduction for your filing status or the value of your itemized deductions, which includes your mortgage interest deduction. Therefore, if your itemized deductions do not exceed your standard deduction, claiming the mortgage interest deduction will actually increase your tax liability.
Tax Bracket
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Your tax bracket refers to the highest income tax rate that you pay when you file your income taxes. The federal income tax uses a progressive tax rate, so higher levels of income are subject to higher tax rates. To find your tax bracket, use the tax rate schedules found in the Form 1040 instructions for your filing status and find the rate for your taxable income. The higher your tax rate, the greater your savings.
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