It’s about time to start filing your 2022 taxes. And many homeowners will be wondering about mortgage tax deductions.
As a general rule of thumb, you can deduct only part of your mortgage costs — and only if you itemize your deductions. If you’re taking the standard deduction, you can disregard the rest of this information because it won’t apply.
So, which mortgage costs are tax-deductible and which aren’t? Here’s what you should know.
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Before you worry too much about making mortgage tax deductions, let’s make sure they apply to you.
As mentioned above, mortgage expenses are tax-deductible only if you decide to itemize your deductions. If you take the standard deduction, you won’t be writing off individual deductions, such as mortgage costs.
Most Americans — about 87% of them, according to the IRS — take the standard deduction.
If your deductions, including your mortgage costs, won’t add up to more than your standard deduction, you’re typically better off taking the standard deduction.
For 2022 tax returns, the government has raised the standard deduction to:
If you can deduct more than your standard deduction, you probably should. Many taxpayers can pay lower taxes by itemizing deductions on Schedule A of IRS 1040. Deductions lower your taxable income. Sometimes, deductions can lower your tax rate, too.
So you plan to itemize your deductions for the 2022 tax year. What does that mean for your mortgage tax deductions?
Your biggest tax break should come from your mortgage interest payments. That’s not your full monthly payment. The amount you pay toward your loan principal isn’t deductible. You can deduct only the interest portion of your payment.
Depending on the size of your mortgage, you may encounter caps on the interest you can deduct. These caps can vary based on the age of your loan.
To be clear, if your loan size exceeds these maximums, you can still deduct some of your interest. But only for interest paid on a loan amount up to those caps.
Beginning in the 2022 tax year, homeowners can no longer deduct mortgage insurance premiums, according to IRS Publication 936.
If you’re still working on a federal income tax return for a previous year, 2020 or 2021, you can still write off mortgage insurance premiums for those years. But the mortgage insurance tax benefit expired at the end of 2021.
It’s possible Congress could bring back the mortgage insurance tax deduction for future tax filers. But it’s not on the table in 2022.
If you were new to homeownership in 2022, you may be able to write off some of the closing costs you paid. But only some closing costs are deductible. Those are usually:
You can take mortgage interest deductions on a second home (perhaps a vacation home) as well as your primary residence.
But the mortgage(s) must have been used to “buy, build, or substantially improve” the property, in the words of Turbotax. And there’s a limit of two homes; you cannot deduct interest on three or more.
If that second home is owned by your son, daughter, or parents, and you’re paying the mortgage to help out, you can only deduct the interest if you co-signed the loan.
If you have a second mortgage, such as a home equity loan or home equity line of credit (HELOC), you may be able to deduct interest paid on those loans.
This rule went into effect with the Tax Cuts and Jobs Act (TCJA) of 2017.
And, again, there’s a cap. You can only deduct the interest on the first $100,000 of your second mortgage’s value.
A “rate-and-term refinance” is one where your new mortgage balance is effectively the same as your old one. A rate-and-term refinance should not generate any new tax deductions.
However, a cash-out refinance may change things.
Discount points (aka “mortgage points”) allow you to buy yourself a lower interest rate by paying a lump sum at closing. In the past, you could deduct the cost of discount points at the end of the tax year in which you paid the lump sum. But no more.
As we’ve already said, the mortgage interest deduction applies only when you’re itemizing income tax deductions — not when you’re writing off the IRS’s standard deduction.
Can mortgage interest, by itself, justify itemizing deductions? For some home buyers, it can.
Let’s say you’re married filing jointly and that you recently bought a home. Your 30-year mortgage’s balance is $750,000. At a mortgage rate of 7.5%, you could easily pay $50,000 in mortgage interest during the first calendar year of the loan. That far exceeds your standard deduction of $25,900.
As time goes on, your annual interest payments will go down. During the last full year of the loan, for example, you’d owe only about $3,500 in interest which is only a fraction of the standard deduction.
Median home buyers are likely to have a loan balance in the $300,000 range. In this case, at 7.5% on a recently opened loan, interest might cost about $20,000.
This amount, by itself, wouldn’t surpass the standard deduction for a married couple. It would exceed the standard deduction for someone who’s filing individually, however.
These scenarios are designed to give you an idea how much new homebuyers pay in interest. Keep in mind the actual amount you paid in interest is unique to you.
The good news: It’s easy to find out. Just check your 1098 form from your lender. If you pay your mortgage payment online, you can probably find the form inside your account.
If the amount you paid in interest exceeds your standard deduction, you could save money by writing off your interest payments.
By its nature, income tax law is complicated, especially when you start itemizing your deductions. If your interest barely exceeds your standard deduction, you might not save enough to justify the extra time and expense of itemizing.
Of course, if your interest is only one of many deductions, compare your combined deductions to the standard deduction to see whether it’s worthwhile to itemize.
This post shouldn’t be used as tax advice — just as general information. Check with a tax professional if you’re still not sure whether it’s worth it to write off your mortgage interest for 2022.
Writing off mortgage interest is the most common way for home buyers to lower their tax bills. Homeownership has some other tax benefits, too.
If you’re self-employed, or a business owner, and you use part of your home as a home office, you can write off your home office expenses, lowering your taxable income.
Renters can do this, too. To qualify, you’ll need a space in the home that you’re using exclusively for business, and you’ll need to record those expenses.
If you sell your main home, or primary residence, you shouldn’t be responsible for the full capital gains tax on the transaction.
If you lived in the home for two out of the past five years, you can qualify for this exclusion.
Homeowners who rent out their real estate property can write off maintenance and materials expenses. Landlords should keep accurate records of rental income and expenses.
Some cities and counties offer tax credits for homebuyers who choose to buy in certain neighborhoods. If you bought a new home in 2022, check your city’s website to see if you qualify for a tax credit.
You can’t deduct your full monthly payment. But you can deduct the portion of it that goes to interest. At the start of your loan, a large portion of each monthly payment is interest. By the end, almost none of it is. Interest payments fall steadily over the life of your mortgage. Again, you can only make this deduction if you itemize your deductions.
Are mortgage points tax-deductible?Yes. But not as a lump sum. With a 30-year mortgage, you deduct 1/30th of the cost of the points each year. With a 15-year loan, you deduct 1/15th. And so on.
Is mortgage insurance tax-deductible?No. As of 2022, private mortgage insurance premiums are no longer deductible. Congress changes tax law periodically, so it’s possible this deduction could come back in future tax years.
Do I have to pay taxes on a cash-out refinance?You don’t pay income tax on the amount you cash out. You may be able to deduct interest paid on the cash-out amount if the money was used to buy, build, or substantially improve your primary or second home.
Are home equity loans tax-deductible?Again, interest on home equity loans isn’t usually tax-deductible. But it should be if you used the proceeds of your loan to buy, build, or substantially improve your main residence or second home.
Is a home equity line of credit (HELOC) tax-deductible?A HELOC is a second mortgage, just like a home equity loan. And the rules are the same. Namely, you can deduct interest only if you used the proceeds of your loan to buy, build, or substantially improve your main residence or second home.
Are closing costs tax-deductible?Some can be. But it’s a shortlist that mostly involves small sums. However, you can deduct your lender’s origination fees (even if your lender paid them for you), which can be worthwhile. See above for the full list. Other than that, you can’t deduct most of the big-ticket items, such as fees for your appraisal, inspection, title insurance, escrow fees, and so on.
Mortgage expenses are tax-deductible if you itemize your taxes rather than taking the standard deduction. And even then, the rules can be complex.
The Mortgage Reports is not a tax website and this information is meant for general guidance only. Speak with a licensed tax professional about your situation before taking any next steps.
If you prefer, the IRS has an online, interactive tax assistant that might help you. You can also download the IRS Publication 936 guide, “Home Mortgage Interest Deduction. For use in preparing 2021 Returns” from its website.
Authored By: Peter Warden The Mortgage Reports EditorPeter Warden has been writing for a decade about mortgages, personal finance, credit cards, and insurance. His work has appeared across a wide range of media. He lives in a small town with his partner of 25 years.
Updated By: Nathan Golden The Mortgage Reports contributorNathan Golden is a freelance personal finance writer in North Carolina. He enjoys writing simple sentences about complex financial products. Along with The Mortgage Reports, Nathan's work has been featured on home.com, money.com, and finder.com. Before becoming a freelance writer, Nathan worked as a newspaper reporter.