How To Deduct Mortgage Interest: Q&A With Paul Miller, CPA

Written by Posted On Monday, 31 August 2020 13:06
Paul Miller, CPA and Managing Partner, Miller & Company LLP Paul Miller, CPA and Managing Partner, Miller & Company LLP
By definition, a mortgage interest deduction is a common itemized deduction that allows homeowners to deduct the interest they pay on any loan used to build, purchase, or make improvements upon their residence, from taxable income. If you itemize, usually you can deduct the interest you pay on a mortgage for your main home or a second home, but there are a few caveats. 
 
Of course, itemizing can take an inordinate amount of time, patience and organization, so we sat down with Paul Miller, CPA and Managing Partner, Miller & Company LLP, for some answers to common questions about this tax deduction, which also applies to those who pay interest on a condominium, cooperative, mobile home, boat or recreational vehicle used as a residence.
 
 
1. What is the mortgage interest deduction?
 
The mortgage interest deduction is interest paid during a tax year on a mortgage indebtedness up to $750,000 (single taxpayer or married filing jointly, or $375k if married and filing separately. 
 
 
2. Who qualifies for it? And who doesn't?
 
Mortgage interest can only be deducted in 2020 if your mortgage interest and your other itemized deductions exceed the standard deduction. To clarify, that would be $24,800 for married filing jointly, and $12,400 for single and married filing separately. Mortgage insurance premiums paid in 2019 can also be deducted.
 
*Editor's note: investment property mortgages are not eligible for the mortgage interest deduction, although mortgage interest can be used to reduce taxable rental income. Home equity debt that was incurred for any other reason than making improvements to your home is not eligible for the deduction.
 
3. What are the pros and cons of the mortgage interest deduction, and how can it make a difference in taxes, even if you're in a non-taxable state such as Florida?
 
If your mortgage interest deduction is greater than the standard deduction, you can claim the interest paid on up to $750,000 in total.
 
Today's mortgage interest rates in the high 2% or low 3% do limit the maximum deduction you are going to get on new mortgages - another factor to consider. For example, if your interest rate is 3% and you had a full $750k and interest-only mortgage, your deduction would be $22,500. Then, you'd need to consider your other itemized deductions, which for most are state and local taxes that are capped at $10,000. So your itemized deductions in this scenario would be $32,500 or 7,700 over the standard deduction for a married couple.
 
The mortgage interest may be available in non-taxable states such as Florida or Texas, as the standard deduction in most cases would prevail, but there are many variatbles to consider and 
 
 
4. What tax form is used to complete the Mortgage Interest Deduction?
 
If you plan to claim a mortgage interest deduction, you'll need a 1098 form which is used to report mortgage interest paid for the year.
 
 
5. How might the mortgage interest deduction change in the coming years? Is there any legislation to do away with it or change it that you think could get passed? What is your prediction?
 
Tough to say, especially when new mortgages sales surged last month to 13.8%. As the Covid situation settles, the government will need to change the rules a bit to spur the economy and give Americans an incentive to buy. As it currently stands, the only incentive is buying versus renting is that you own a piece of property that hopefully one day will be paid off and sold at a profit - which can be a gamble.
 
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Paul Miller, CPA is a 30 year veteran in the accounting industry. Miller and Company, LLP is a top accounting form in NYC with locations in Manhattan and Queens. Other locations include Sarasota, Florida and Washington, DC. The company has a staff of over 25 employees and services approximately 3,000 clients. 
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