Understanding Mortgage Tax Deduction

The below information is solely intended to provide some insight regarding the effects of purchasing a home and potential income tax deduction. This AskChristee article is provided to allow you to make smarter home buying decisions. Please check with your tax advisor for additional information.

To begin a discussion of potential tax deductions, we will first review current Federal tax brackets (see chart below). We will focus on the Single tax filing column and the Married filing jointly for two reason – (1) there is only a marginal difference in brackets for filing single and head of household and (2) most married people file their taxes jointly.

Federal Income Tax Brackets

Tax Rate

Single

Tax Amount

Married filing Jointly

Tax Amount

10%

$0-$10,275

$1,027

$0-$20,550

$2,055

12%

$10,276 up to
$41,775

$3,779

$20,551 up to

$83,550

$7,559

22%

$41,776 up to

$89,075

$10,405

$83,551 up to

$178,150

$20,811

24%

$89,076 up to

$170,050

$19,433

$178,151 up to

$340,100

$38,867

32%

$170,051 up to

$215,950

$14,687

$340,101 up to

$431,900

$29,375

35%

$215,951 up to

$539,900

$113,382

$431,901 up to

$647,850

$75,582

37%

Greater than

$539,900

 

Greater than

$647,850

 

AskChristee Calculates Estimated Tax Deduction and Tax Savings
Tax Savings Are Based Upon Filing Taxes as either Filing Single or Married Jointly

Reducing Tax Liability

If you are like most people your goal is to lessen the amount you pay in Federal income taxes. The easy way to lessen your tax liability is to legally reduce your taxable income by way of taxable deductions. There are two types of deductions for personal income taxes:

  1. Standard Deduction
  2. Itemized Deductions

Standard Deductions

The standard deduction reduces a taxpayer’s taxable income (adjusted income). The theory is that only households (people) with income above certain levels will pay any Federal income taxes. Taxpayers have the option to claim the standard deduction, thereby reducing their taxable income and the taxes they owe.

Standard Deductions 2022

Single

Head of Household

Married Filing Jointly

Married Filing Separately

$12,550

$18,800

$25,100

$12,550

Examples with Standard Deductions

If you are a single person and making $55,000 per year. Your adjusted or taxable income, with standard deduction of $12,550, is $42,450 ($55,000 minus $12,550). In other words, you will pay Federal taxes based upon an income of $42,450 (not $55,000). Your Federal Tax liability is $4,954.28 (1027+3779+(.22*(42450-41776)) – see chart above.

If you are married filing jointly and making $55,000, your adjusted taxable income is $36,200 based upon a standard deduction of $18,000 ($55,000 minus $18,800). Your tax liability is $3,932.88 (2055+(.12*(32600-20551)) – see chart above.

Notice the tax liability is less for married people filing jointly when compared to filing as a single person. This is because the standard deduction is higher and the tax bracket is less.

Itemized Deductions

Itemized Deductions include: If your deductions exceed the standard deduction, then you will probably file your tax return using itemized deductions. Example of deductions are:

  • State and local income or sales taxes
  • Mortgage interest
  • Real estate taxes
  • Personal property taxes
  • Disaster losses
  • Gifts to charity
  • Medical and dental expenses up to 7.5% of your adjusted gross income

Example of Mortgage Interest and Property Taxes as Itemized Deduction:

A single person making $55,000 purchases a $259,700 house with a $251,900 mortgage loan at 3% for 30 years. The annual deduction for interest and property taxes is $10,063.

The standard deduction for a single person is $12,550, which is great than mortgage deduction of $10,063 by $2,487. This person would need to review other potential deductions such as state income or sales tax. In other words, the goal is to find another $2,487 in deductions to itemize the deductions. If you live in a State with state income tax, finding the additional deduction will be easier.

Mortgage Interest Rates and Term

If we change the mortgage interest rate to 4% for the above example, the annual deduction for interest and property taxes is increased to $12,574, which is above the standard deduction of $12,550.

Ironically, higher interest rates or shorter mortgage terms create a higher mortgage deduction.

When Interest Rates increase, the benefits of Mortgage Interest Deductions become more important

Is it better to itemize or take the standard deduction?

If your mortgage deduction is higher than the standard deduction then you should probably itemize your deductions. Conversely, if the mortgage deduction (plus other potential deductions) is less than the standard deduction, then you will probably use the standard deduction.

Should I itemize if I bought a house?

For most people who itemize, having a mortgage helps push their itemized deductions higher than the available standard deduction. In January, your mortgage lender should provide you with Form 1098 (Mortgage Interest Statement). This is the mortgage interest paid the prior year. Add annual property taxes to this amount and you have the ‘mortgage deduction’.

To View Estimated Mortgage Deduction and Potential Tax Savings, Run:

AskChristee PreQual Module or
AskChristee Buyer Choice Module

Other AskChristee Modules Also Provide Estimates of Mortgage Deduction