Question:

How can I calculate home mortgage interest tax deduction and are there any deduction limitations?

Answer:

Mortgage interest tax deduction is equal to the amount of interest you pay on your home loan during the year. Therefore, to calculate your mortgage interest deduction you simply need to take your monthly payment notices for the year, from your lender and add up the interest payments shown in them.

If you've misplaced your notices you can calculate the interest paid yourself by creating a mortgage payment schedule for the current tax year. Remember though, that the interest payments during the year would depend on the type of the mortgage (fixed rate, buy down, ARM etc) and the number of years you are into the loan.

Limitations on Home Mortgage Interest Tax Deduction:

Most people will be able to deduct full interest payment from their taxable income but there are some limitations to the mortgage interest tax deduction. Loans are separated into 3 categories and the limitations on each are as follows:

  • Category 1:

    All mortgages taken before October 13, 1987 fall under this category. They are also called grandfathered debts and have no limitations on them.

  • Category 2:

    All mortgages taken after October 13, 1987 plus any grandfathered debts, to buy/build/improve a home, fall under this category. Deductions for this category are limited to a total of $1 Million ($500,000 for a married person filing tax separately).

  • Category 3

    All mortgages taken after October 13, 1987, plus any grandfathered debts, not to buy/build/improve a home, fall under this category. Deductions for this category are limited to a total of $100,000 ($50,000 for a married person filing tax separately).

There is another limitation on category 2 and 3 loans. If the amount of the loan is greater than the value of the house plus improvement costs, then the interest paid on the difference of the two amounts cannot be deducted from taxable income (unless it comes under other deductable items such as business expenses, qualified charities, etc).

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