Is mortgage interest tax-deductible?
Federal and state taxes are an essential part of how our economy functions. They maintain Government programs, pay for infrastructure and education, and finance the maintenance of every city, town, and village. So, taxes are an inescapable reality of life. However, it’s worth your time to try to get every tax break possible to reduce what you owe to the government. Two things to consider when trying to reduce your taxes are mortgage interest and expenses incurred from use of a home office. Both of these mortgage interest tax deductions can be a significant savings when determining your taxable income. However, always consult an accountant when filing your tax returns.
An income tax deduction doesn’t directly reduce the taxes you owe to the government dollar per dollar. In fact, tax deductions lower your gross income that calculates the income tax you owe. The sum by which your tax bill is reduced variably depends on your income tax rate—the higher your tax rate, the bigger your tax deduction at the end of the year. Essentially, there’s more money in your pocket.
By law, your mortgage company must provide a 1098 form, which is a statement of interest you paid over the last year. Late fees and points can also be deductible. For example, if your 1098 Form has $8,000 of mortgage interest in Box 1 and your office is 15% of your home, you can deduct 15% of your interest, or $1200.
Can you deduct property taxes and mortgage interest?
Taking the plunge into buying real estate is the most effective path towards freedom and financial independence. You gain incredible returns and even more great tax breaks. Putting down a large sum on your down payment is out of reach for many buyers. It’s crucial to take advantage of every deduction out there to maximize your benefits.
As a homeowner, the most significant tax deduction you’ll ever receive is your mortgage interest. However, property taxes are another way to lower your tax bill. In general, you can claim real estate taxes on your property in the year you pay them. You can deduct up to $10,000, and don’t forget to include any reimbursed property taxes to the previous homeowner.
While tax deductions from mortgage interest and property taxes are a valid reason to buy a home, the reality is that these deductions do not offset the costs of interest and insurance. Take advantage of your tax breaks and combine property taxes and mortgage interest to maximize your yearly deductions.
How to calculate mortgage interest tax deduction
As discussed before, if you are a homeowner and part of the space is used to operate a business, you can deduct the mortgage interest and the portion of the home used for business purposes. It must have a sleeping, cooking, and toilet facility to become an eligible facility. For example, a lawyer has a home-based operation. He transformed one of the bedrooms into his home office, and it’s used exclusively for business purposes. The room totals 15% of the home’s square footage so he can deduct 15% of his annual mortgage interest as a business expense.