A roof to stay under, the right to call it one’s own is a privilege of every homeowner. But the purchasing of a house is no trivial matter with the large amount of capital involved. Most people apply for a mortgage loan to raise the necessary investment capital but then you must pay the lender a percentage of the loaned investment as interest (since the risk is shared with the lender). Shared investment = shared risk = shared expense, with interest being the biggest potential chunk of that.
Thankfully the government allows you to deduct the interest on the mortgage loan, lowering the burden. All you need to do is file a correctly filled Schedule A with Form 1040. In short, home owners don’t just do “EZ” tax filing. If you file a 1040EZ, you cannot claim the mortgage interest deduction.
How is the Tax Reduced?
First the actual amount of interest which you can deduct should be calculated according to the guidelines provided by the IRS. Your mortgage lender sends you a 1098 with the correct number. The amount is entered on Schedule A and subtracted from your annual income. The result is taken as your real income, and the tax which you will have to pay is calculated from this lower number, effectively lowering the amount of tax which you have to pay by reducing your income by the amount you had to pay for interest.
For example, if you apply and get accepted for a mortgage loan in Greater Boston and the amount of interest which you pay every year amounts to $5,000, when you apply the mortgage tax deduction, your overall income will be calculated as X-5000 (X being your total income). This will lower the amount of tax which you have to pay to the government.
Qualifying for Tax Deductions
- The loan interest is only tax deductible if it is your primary or secondary home.
- The loan must be secured by the same qualified home.
- You must file the Schedule A form filled in with all details in the time allotted.
- The legal liability of repayment of that loan must reside with you i.e. you cannot deduct a interest amount which you have paid for your friend etc.
Documents Required While Applying for the Tax Deduction
- Mortgage Interest Statement: Also known as Form 1098, this is a statement provided by your lender which will contain the exact amount of interest which you paid during the previous fiscal year. You need not attach this while submitting your tax returns since a copy would have been sent to the IRS by the lender directly. So make sure that the interest which you claim for deduction matches those present in the statement.
- Publication 936: This publication from the IRS will provide you will all of the information which you require to calculate the amount of mortgage interest which actually is deductible. (http://www.irs.gov/pub/irs-pdf/p936.pdf)
- Schedule A: You will also require the Schedule A form to fill in the details of your itemized deductions. (http://www.irs.gov/pub/irs-pdf/f1040sa.pdf)
- Instructions: Instructions to help you fill the itemized deductions form (http://www.irs.gov/pub/irs-pdf/i1040sca.pdf).
Once you have all of the above you can easily file for tax deductions. Just make sure to keep a copy of all records with you for a minimum of three years.
Keep in mind we’re not attorneys or tax professionals and none of this should be construed as tax advice. Confirm the accuracy of anything with your tax accountant.
Lender Tip: You need not worry about the interest payments which you make to us, since you can claim them as tax deductions. Contact us for a mortgage loan now.