If you are a new homeowner, you probably hate thinking about having to make monthly tax payment. Did you know that you can lower those payments by applying for a mortgage interest deduction?
Anyone who became a homeowner after December 15th 2017 has the right to apply for deduction on the first $750,000. In other words, the mortgage interest deduction requires itemizing on tax return. It is still possible to qualify for mortgage interest deduction in Milwaukee in 2020. Read below if you want to learn more.
How Mortgage Interest Deduction Works?
The mortgage interest deduction serves to help you reduce your taxable income by the amount that depends on the amount you’ve paid during the year in mortgage interest. This is another reason why it’s important to keep good records of your mortgage payments, as it can help you cut your taxes. In general, you can deduct on the first $1 million of your mortgage debt, either for your primary or second home. If you’ve made the purchase of your home after 15th December 2017, then you can deduct the interest you’ve paid on the first $750,000.
However, keep in mind that if you’ve signed a contract before the said date, and agreed to close before 1st January 2018, and closed the house before 1st April 2018, the IRS will consider that you have obtained the mortgage before the 16th December 2017.
What Qualifies as a Mortgage Interest?
According to the IRS Publication 936, these things qualify as an interest for your main property: The property can be a house, apartment, co-op, condo, mobile home, house trailer or even a houseboat, but it has to have collateral for the loan and sleeping, cooking and toilet facilities. It still counts if you have gotten the mortgage to ‘buy out’ your ex’s half of a house in a divorce, or if you’ve gotten a nontaxable housing allowance through some programs that are given via military or the ministry. If you are looking to get an interest deduction for your second home, than this home doesn’t have to be used during the year, but it has to be collateral for the loan and if you’re renting it, you have to be in it for at least 14 days, or 10% of the number of days you have rented it.
Also, there are points that you have paid, that count as a prepaid interest on your loan. You can deduct them little by little or all at once, depending on which requirements you have met. The requirements are:
- Mortgage has to be for your main house
- Paying points have to be a practice in your area
- The points can’t be unusually high
- The points can’t be for closing costs
- Your down payment has to be higher than the points
- The points are computed as percentage of the loan
- The points are on the settlement statement
- You have to use cash method of accounting when doing your taxes.
What Doesn’t Count
There are some things that don’t count for interest deductions, such as homeowners insurance, extra principal payments, title insurance, most settlement costs, deposits or downpayments, as well as interest that is accrued on a reverse mortgage.
How to Qualify for the Mortgage Interest Deduction in 2020
Yes, you can qualify for the interest deduction in 2020, but there are some steps that you need to take beforehand.
1. Find Form 1098
Your mortgage lender sends the Form 1098 in the beginning of the year, usually January or early February. This form shows how much you paid in mortgage interest (or points, if you decided to purchase them) during the past tax year. One copy of the form is always sent to the IRS, which will try to match it with your tax return report. You will get this form if you’ve paid $600 or more of mortgage interest and points during the year.
2. Keep your records good
If your records are good, you may be able to deduct mortgage interest in several more situations, including using your house as a home office, if you are the owner of a co-op apartment, if you’ve rented part of your home, or if the home was a time share. Also, you may be able to qualify even if part of your mortgage proceeds was used to pay down debt or to invest in something unrelated to your house. You can qualify for interest deduction even if your house was under construction or destroyed during the year. It also counts if your ex has to pay the mortgage after the divorce on a home you both own.
3. Itemize on your taxes
In order to qualify for mortgage interest deduction, you will have to fill out the Schedule A of Form 1040. This means that you will have to itemize on your taxes, which can end up with you spending a lot more time preparing for taxes. However, it’s good to itemize on your taxes anyway as this can help you save money.