Here are the grandfathered amounts for mortgages purchased before 2018 (you may claim these amounts on 2018-2025 Tax Returns if you purchased the mortgage before 2018)
Married Filing Jointly/Qualifying Widow
Head of Household
Married Filing Separately
Home Equity Loans and Lines of Credit
For home equity loans incurred after December 15, 2017, you cannot deduct interest on the debt unless it is used to buy, build, or improve your home that secures the debt. Your interest deduction is limited to debts up to $750,000 (Married Jointly Filers) or $375,000 (Married Filing Separately). Home equity loans incurred on or before December 15, 2017 are grandfathered into the old $100,000 debt limit and the interest deduction can be applied to non-home expense payments (college tuition, credit card debt, etc.).
Mortgage Insurance Premiums
The tax deduction for mortgage insurance premium payments expired on December 31, 2017. Though you cannot claim it on your 2018 Tax Return, you may report it on 2017 and earlier Tax Returns. If your Adjusted Gross Income (AGI) is $100,000 or less, you can deduct 100% of your insurance premium payments. Your deduction amount is reduced at an AGI of over $100,00, and the deduction is not available to you if your AGI is over $110,000.
Mortgage points are fees you pay to a mortgage loan lender at a reduced interest rate during the closing of an exchange. You can deduct all your points as mortgage interest in the year you pay them if you meet all of these requirements:
- You use a loan to build or buy your main home.
- Your main home secure your loan.
- Paying points is an established business practice in the area where the loan is created.
- The points you paid were not more than the loan amount usually charged in that area.
- You report income in the year you receive it and deduct expenses in the year you paid them.
- The point you paid were not for items usually listed separately on a settlement sheet (such as appraisal fees, inspection fees, and property taxes).
- The funds you provided before or at closing (including seller paid points) were at least as much as the points charged. Be aware that you cannot have borrowed the funds from your mortgage broker or lender in order to pay the points.
- The points were calculated as a percentage of the main amount of the mortgage.
- The amount is clearly shown as points on your settlement statement.
There are two types of mortgage points, discount and origination.
Discount points are fees you may pay upfront to lower the interest rate on a mortgage loan. Each point is equal to one percent of the loan amount (one point equals $1,000 for every $100,000 of the loan amount, so one point on a $250,000 loan is $2,500). Therefore, the more points you pay, the less you pay on your interest rate (usually by 0.25%) and monthly loan payment.
Your discount points are deductible when you rent out a main or second home if:
- The mortgage is obtained to build, buy, or improve the home (and the home is the collateral for the loan) and
- The money you use to buy the points is paid directly to the lender (not borrowed).
For example, George borrows a $100,000 mortgage with a 5% interest rate, making his monthly payment $537. When he purchases three discount points, his interest rate goes down to 4.25%, making his new monthly payment $492.
However, the upfront costs of taking out a mortgage may increase when you purchase points. Therefore, if you plan to sell or refinance your home before a break even point, it may not be best for you to buy points. In George's case, the three discount points he purchased would cost him $3,000 in exchange for saving $45 a month, so he would need to keep his home for 66 months (or 5 and a half years) to break even on his point purchase.
Origination points are required fees you pay to a loan leader (either upfront or throughout the the life of the loan) to cover the lender's costs of creating and processing a loan (i.e. fees charged by loan officer or broker and others who work to execute the loan). Each origination point is 1 percent of the total loan amount.
Your origination points can be claimed as a depreciation expense in the year you borrow the loan or over the lifespan of the loan, depending on how the points are paid. Be aware that the points are non-deductible on non-rental properties.
Deductible and Nondeductible Examples
Home Mortgage Interest Payments
- In February 2018, Jack and Jill take out a $500,000 mortgage to purchase a main home at a fair market value of $800,000. In March 2018, they take out a $250,000 home equity loan to include an addition on the main home. Since the total amount of both homes do not exceed $750,000 and they do not exceed the cost of the home, all the interest they paid on the loans is deductible. However, if they use the home equity loan to pay for personal expenses (i.e. pay off credit card debt and/or student loans), then the interest on the home equity loan is not deductible.
- In January 2018, Mary and Bill take out a $400,000 to purchase a main home. In July 2018, they take out a $150,000 loan to purchase a vacation home. Since the total of both mortgages do not exceed $750,000, all the interest they paid on both mortgages can be claimed as a tax deduction.
- In July 2018, Josh borrows $50,000 to remodel his kitchen and bathroom. In November 2018, he takes out a $100,000 loan to upgrade his living room. He can deduct the total amount of interest he paid on the home improvement loans throughout the year.
- In April 2018, Sam buys a house and paid $1 million via a mortgage. He can only claim the interest on $750,000 of the $1 million as his mortgage interest deduction. He does not receive a mortgage interest deduction for the remaining interest paid on $250,000 of the $1 million.
- In May 2018, Lucy purchases a main home with a $500,000 mortgage. In August 2018, she takes out a $700,000 loan to buy a vacation home. Since the total amount of both mortgages is over $750,000, not all of the interest she paid on the mortgages is deductible. She can only claim one percent of the total interest she paid as a tax deduction.
- In August 2018, Michael and Jan (filing Married Filing Separately returns) borrow $500,000 to remodel their basement and kitchen. In October 2018, they borrow $300,000 to upgrade their bathroom and two living rooms. They can only claim the interest on $375,000 of their total 800,000 home improvement loans.
- In February 2018, Susan and Adam buy a main home with a 700,000 home equity loan. In June 2018, they take out a $100,000 home equity loan on the main home to buy a vacation home. They cannot deduct the interest payments on the $100,000 loan since it was not used for the main home.
- Sara pays $4,000 in points and will make 360 monthly payments on a 30-year loan. This makes her allowable deduction $11.11 per payment (or $133.33 for 12 payments).
- Jeremy purchases $3,600 in points on a 30-year loan to buy a vacation home. He deducted a total of $540 in points on his prior year tax returns, then he sold the home. This means that he can claim a deduction on $3,060 in points on his 2018 tax return ($3,600 minus the $540 he previously deducted).
- Bella and Edward refinanced their $200,000 loan with a new 30-year $250,000 mortgage. In 2018, they paid $2,000 in points and used the extra $50,000 to make home improvements. They can claim a 20% deduction of $400 ($50.000/250,000 x 2,000) of points on their 2018 tax return. They must deduct the remaining points over 360 monthly payments or $53.28 ($1,500/360 x 12) per year.
- Peter and Jane buy a vacation home with a mortgage loan from a lender. Then, they refinance that mortgage with the same lender to get a lower rate and reduce the term of the loan to 15 years. The refinance has no points. Since they refinanced with the same lender, they cannot deduct the remaining unamortized points worth $3,060. Those points must be amortized over the 180-month term of the loan.
How to Claim the Tax Deduction
When you prepare your tax return on efile.com, you can enter your Home Mortgage Interest Tax Deduction on the Mortgage Interest - Form 1098 screen. We will calculate the deduction amount for you and report it on Schedule A of your return. Schedule A will automatically be generated based on the information you enter on the Mortgage Interest - Form 1098 screen.
More Information on Tax Deductible Home Expenses