Mortgage tax deductions for the 2019 tax season don’t apply to all
Mortgage tax deductions and other homeowner costs were affected by the federal government’s 2018 tax overhaul.
We dig into the details about current mortgage tax deductions below. But before you read on, a few notes:
This guide will not be relevant to everyone. If you take the “standard deduction” on your taxes — which 90% of people are expected to do — your deduction will be one lump sum. That means you don’t need to know about the individual mortgage tax deductions listed below.
If you’re doing an “itemized deduction,” however, you’ll want to know about the mortgage deductions listed here.
A few other caveats:
- Everything in this guide applies only to federal taxes collected by the Internal Revenue Service (IRS)
- You may have to pay state taxes separately
- The following information applies to owner-occupiers (those who live in the home that they own)
- If you’re interested in deductions for investment properties, or if you live in a co-op, different rules may be applicable
So to recap: If you own and live in your home, and plan to file an itemized tax deduction on your 2019 taxes, use the guide below to maximize your deductions and save.Find a low-cost mortgage or refinance in 2020 (Dec 3rd, 2020)
See deductions for:
- Closing costs
- Mortgage points
- Mortgage interest
- Refinance costs
- Mortgage insurance
- Property tax
- Homeowners insurance
- Home improvements
- Home equity loans
- Home offices
Learn the basics:
Are closing costs tax-deductible?
When it comes to deducting closing costs/points, you can deduct only certain closing costs when you buy a home (refinancing may be different). These include:
- Mortgage origination fees — the “points” (but not discount points) charged by your lender for setting up the loan. But you can’t deduct third-party fees, such as those for your home appraisal, title search or home inspection
- Sales tax on the transaction
- Real estate taxes paid on closing (even if those were paid by your lender)
The rules surrounding these deductions are quite complicated. So you can’t just assume you can itemize them all in full. Check with your attorney or another professional whether you should include them in your filing.
Are mortgage points tax-deductible?
Mortgage points or “discount points” are typically tax-deductible, because they count as advanced mortgage interest payments. But the word “advanced” is significant. Because you can’t deduct the entire cost of your points in the tax year when you buy them. You have to spread deductions across each year for the lifetime of your mortgage.
Is mortgage interest deductible?
Most homeowners should find they can continue to claim mortgage interest deductions as they did last year.
There are two things to remember:
- You can only deduct the interest you paid — Not your actual monthly payments. The amount by which you reduce your principal balance (the balance you still owe on the sum you originally borrowed) is not deductible
- The 2018 tax reform capped the amount of interest you can deduct. If your mortgage dates on or before December 15, 2017, you can deduct the interest you paid on the first $1 million of your mortgage. If it’s dated after then, your deduction will be less: the interest you paid on the first $750,000
Just to add to the confusion, there’s a small exception surrounding that 2017 date. If you already had a signed contract in place then with a closing date of Jan. 1, 2018, and you actually closed before April 1, 2018, you get the higher deductible allowance.
Mortgage interest deductions can make a big difference in the first few years
The good news for those who bought their first home within the last decade or so is that (deductible) interest makes up most of your monthly payments.
This is a result of something called “amortization,” which calculates how each month’s payment gets you closer to your zero balance when your mortgage is due to expire.
In fact, you won’t normally pay more to reduce your balance each month than you do in interest before you hit year 18 with a standard, 30-year, fixed-rate mortgage.
So you can make a mortgage tax deduction on most of your monthly payments during your early years of homeownership. And that’s when you’re most likely to feel the financial strain of owning a home.
Is PMI tax-deductible?
If you pay for private mortgage insurance (PMI) or mortgage insurance premium (MIP) on an FHA loan, the news is good. In December 2019, Congress extended the law that allows insurance payments to be treated as mortgage interest for tax-deduction purposes.
But watch out if you count as someone with a higher income (above $54,500 for individual filers, or $109,000 for married couples). You may not get your deductions.
These PMI or MPI deductions can be made for your primary residence and one other home, perhaps a vacation property.
Are there refinance tax deductions?
Generally, the ability to make a mortgage tax deduction is the same for ordinary borrowers and those refinancing.
But, when it comes to closing costs on refinances, H & R Block explains that there are restrictions:
“You can only deduct closing costs for a mortgage refinance if the costs are considered mortgage interest or real estate taxes. Your closing costs are not tax-deductible if they are fees for services, like title insurance and appraisals.”
If you refinanced in 2019, you can deduct these items considered mortgage interest:
- Mortgage insurance premiums — for contracts issued from 2013 to 2018 but paid in the tax year
- Mortgage points or “discount points” — since they’re considered prepaid interest. You must usually allocate points over the life of the loan
PMI and MPI deduction rules are the same for those who are refinancing. You may not be able to deduct mortgage insurance payments if your income exceeds $54,500 for individual filers or $109,000 for married couples.
Are property taxes deductible?
You should still be able to deduct up to $10,000 in property taxes (or $5,000 if married and filing separately).
If your property taxes aren’t that high, you may be able to top up by deducting state sales taxes and state and local income taxes. However, your total deduction for all those can’t bust that $10,000 or $5,000 ceiling.
There are some rules surrounding property tax deductions.
You can only claim for a home that you own, though you don’t necessarily have to occupy it. You can’t deduct taxes that have been demanded but that you’ve yet to pay. And you can’t itemize expenses that aren’t taxes, such as homeowners association fees or assessments for improvements (but you can for repairs or maintenance).
You cannot deduct services such as garbage collection or water, either, even though these might appear on your property taxes bill.
Is homeowners insurance tax-deductible?
An easy one! No, you can’t deduct homeowners insurance premiums. The only exception is if you’re running a business from your home. In that case, see the home office deduction rules below.
Are home improvements tax-deductible?
As a general rule, no — you cannot deduct the cost of home improvements directly. The only exception is for “medically necessary” changes to the property, such as making the house more accessible for a disabled occupant.
That said, you may be able to make your improvements more tax efficient.
For example, you could take advantage of your mortgage tax deduction. Carry out your renovations when you buy your home so they’re part of your original mortgage.
Or, use a cash-out refinance to make home improvements. Because then you should be able to deduct your loan interest.
Oh, and watch out too for the “energy tax credit.” This applies to Energy Star-compliant items such as solar panels, small wind turbines, geothermal pumps, and fuel cells. Buy any of those, and you can knock 30% of the cost off your federal taxes.
Are home equity loans tax-deductible?
The only tax deduction still available for home equity loans and HELOCs is that on money borrowed for home improvements. Or, in the IRS’s words, when it’s used “to buy, build or substantially improve the taxpayer’s home that secures the loan.” That may be your main residence or a second home defined as a “qualified residence.”
The caps that apply to your main mortgage ($750,000 on newer loans and $1 million on older ones) apply to your main mortgage and home equity loan(s) combined. So, if you’re borrowing big, you need to keep that in mind.
What’s the home office deduction for 2020?
Those running a business from home may have opportunities for further deductions across a range of expenses — from heat and power to homeowners association fees and from homeowners insurance to home repairs.
But home office deductions aren’t a free-for-all, and the rules are strict:
- You can only deduct for space that’s dedicated to your business. A desk in an area that’s also used for normal living won’t cut it
- Deductions are based on the percentage of your home’s floor area (square footage) that your dedicated workspace occupies. If your home office takes up 8% of your home, you get to deduct 8% of many of your household bills and costs
The IRS knows what typical taxpayers with home offices deduct. Overclaim, and you could face an audit.
What does tax-deductible mean?
Perhaps surprisingly, the IRS website offers a simple definition of what a tax deduction is:
“Subtract tax deductions from your income before you figure the amount of tax you owe.”
In other words, you only pay tax on taxable income. For instance, if you made $80,000 in 2019, but have $25,000 in deductions, then you only made $55,000 in the eyes of the IRS. Ultimately, that means you pay less in taxes at year-end.
This can make a mortgage tax deduction very attractive — but only for some.
If you’re taking the standard deduction, which most people do, the amount you spent on your home or mortgage this year won’t make a difference for tax purposes.
Itemized deductions vs. standard deduction
Pretty much all taxpayers can claim deductions. When tax season comes around, most people choose to the standard, nationwide deduction because it’s easier; plus, the standard deduction is bigger than the itemized total for most people.
- Standard deduction — The nationwide, standard amount subtracted from your taxable income. The amount depends on your filing status
- Itemized deduction — The total of all tax-deductible items, subtracted from your taxable income
If your affairs are complicated or your income high, you’ll probably want to itemize your deductions. That means you list each item separately on your tax return to determine the most you can deduct.
But roughly 90% of American taxpayers have chosen not to itemize since the 2018 tax reforms, and that’s likely to continue.
That’s partly because itemized deductions are a time suck. But it’s also because the IRS offers a standard deduction that’s quite generous to most.
For the 2019 tax season, standard deductions are:
- $12,200 for those who are single, or married and filing separately
- $18,350 for those filing as the “head of the household”
- $24,400 for married couples filing jointly
Of course, it’s up to you to decide whether you’d be better off itemizing rather than taking the standard deduction. And, if so, whether it’s worth the hassle of the additional admin.
If in doubt, you should probably consult a tax professional.
Standard deduction example
Tax deductions can be hard to grasp, so let’s look at an example:
|Filing status||Single/Married but filing separately||Head of household||Married and filing jointly|
*$100,000 assumes each spouse makes $50,000 per year, and both incomes are combined for tax purposes
Imagine you earned $50,000 in 2019. If you’re single, or married and filing separately, you can make a standard tax deduction of $12,200. So your taxable income would be $37,800 ($50,000-$12,200=$37,800).
Now imagine you still made $50,000 in 2019, but you’re filing as head of household — meaning you make more than 50% of the household income, and have a child or other dependent.
As head of household, your taxable income on a $50,000 salary drops to just $31,650, because you’re able to deduct $18,350.
Finally, consider a married couple filing jointly. In this scenario, both spouses’ incomes are combined.
So if each person takes home $50,000 per year, their pre-tax income is $100,000. Minus the standard deduction of $24,400 for joint filing, their taxable income comes out to $75,600.
Should you take the standard deduction or itemize?
Remember that if you opt to take the standard deduction, you can’t itemize any other deductible items. So most of the information in this article won’t have applied to you.
But how do you know whether to take the standard deduction or itemize?
Sadly, there’s no magic formula to tell you. Because everyone’s list of deductibles is different, as are people’s financial circumstances.
Whether you should take the standard deduction or itemize depends on your income, and therefore your tax bracket; the number of deductions you can claim; whether you do your own taxes (and how much you dislike them); your tolerance for administrative tasks, and so on.
Unless your situation is obvious (like if you’re exceptionally wealthy), you should probably roughly calculate how much you could deduct and compare that to the standard deduction.
If you could reduce your tax bill by a worthwhile amount by itemizing, then take that route. If you’re not sure, speak with a professional.
2020 federal income tax brackets
Your deductions — itemized or standard — determine the amount of your yearly income that can actually be taxed. But once you arrive at that number, how much money will actually be taken out in taxes? That depends on your tax bracket or “tax rate.”
The IRS lists this year’s income tax rates:
“For tax year 2020, the top tax rate remains 37% for individual single taxpayers with incomes greater than $510,301 ($612,351 for married couples filing jointly).
The other brackets are:
- 35% for incomes over $204,100 ($408,200 for married couples filing jointly)
- 32% for incomes over $160,725 ($321,450 for married couples filing jointly)
- 24% for incomes over $84,200 ($168,400 for married couples filing jointly)
- 22% for incomes over $39,475 ($78,950 for married couples filing jointly)
- 12% for incomes over $9,700 ($19,400 for married couples filing jointly)
“The lowest rate is 10% for incomes of single individuals with incomes of $9,700 or less ($19,400 for married couples filing jointly).”
Tax brackets example
Suppose you earned $50,000 in 2019. What percentage of that do you have to pay of that income in taxes? Here’s how your taxed income would break down:
- 10% on the first $9,700 you earn ($970)
- 12% on the next $29,775 ($3,573)
- And 22% on the final $10,525 ($2,315)
So, without deductions, you’d owe $6,858 in taxes on a $50,000 income.
To recap how we got there: The numbers that are not in brackets add up to your $50,000 earnings. The numbers that are in brackets are your taxes owed. These are calculated by applying the relevant tax rate to each portion of your earnings, according to those IRS bullet points.
Don’t forget, these are only numbers for federal taxes. Depending on which state you live in, you may also have to pay state income taxes separately.
Also, remember that our examples are purely illustrative. They’re only intended to give you a rough idea of what to expect, and your own taxes will look different.
Mortgage tax deductions for 2019 taxes: Summed up
To sum up, here are the major things you. should know about mortgage tax deductions for the 2020 filing season:
- If you’re taking the standard deduction, you don’t need to worry about mortgage tax deductions
- If you’re taking itemized deductions, there are some mortgage costs you can deduct. See the full list above
- State rules may differ from federal rules. Check state resources to learn more about mortgage deductions
Most people take the standard deduction, which means your mortgage costs won’t help you save on your 2019 taxes.
Looking for other ways to save on housing costs this year? Consider a mortgage refinance. Rates are low, and you may stand to cut your monthly payment by a significant amount.Verify your new rate (Dec 3rd, 2020)