At What Income Level Do You Lose Mortgage Interest Deduction?

Have you recently taken out a mortgage and are wondering how much you need to earn before you lose your interest deduction? Maybe you have bagged a promotion and want to know if that will impact your mortgage interest?

Or perhaps you are curious and want to know more? Whatever your reason might be, we have the answer for you!

We know how stressful mortgages can be, especially when you are handling interest deductions.

One wrong move or miscalculation and you find yourself in a never-ending spiral of numbers and interest rates. Unsure who to trust or where to turn. You find yourself haunted by numbers in your sleep, unable to focus on anything else. 

Well, no more! Today we are here to tell you at what income level you lose your mortgage interest deduction. Keep reading to find out all you need to know about mortgage interest deduction and banish the number panic forever! 

What Is Mortgage Interest Deduction?

Before we get into it, let’s have a recap for those in the room that need it!

Mortgage interest rate deduction is a deductible that allows homeowners to deduct any interest they pay on loans used to purchase their home, build or make improvements on it.

The money used to do these things must come from the homeowner’s taxable income (i.e., from employment), although you can also use the deduction on loans taken for second homes and vacation properties.

There are certain limitations to these, and it’s best to speak to a professional financial advisor about them if you want more information.

Your mortgage interest is reported on the 1040 tax form, which you can use to claim your deductible interest. You can do this yourself or with the help of financial professionals if you are unsure how to proceed.

You can do this every year when your tax rebates are due, allowing you to make the deduction and lower the amount of tax that homeowners owe.

For many homeowners, it’s a breath of relief and allows them to save some money and lower the tax they need to pay.

But the mortgage interest deduction is not available for everyone, and changes in 2017 meant that the income level has changed, and now not everyone qualifies. To find out at what income level you lose mortgage interest deduction, keep on reading!

At What Income Level Do You Lose Mortgage Interest Deduction?

Now that we have covered what mortgage interest deduction is, let’s get straight into it! In 2017, the Tax Cuts and Jobs Act (TCJA) changed the rules to individual income tax.

As a result, the mortgage deduction limit was lowered, and there was a limit placed on what you can deduct from your home equity loan debt.

Previously, the mortgage interest deduction limit was $1 million. But since 2017, it is now $750,000. So now, single filers and married couples that file jointly can deduct the interest up to $750,000 per year for a mortgage.

However, married couples that file their taxes separately can deduct up to $375,000 each.

While the $750,000 rule will apply for many people, some exceptions will allow you to deduct interest above the $750,000 threshold.

These are the following exceptions that if your loan falls into, you can deduct the interest on your mortgage:

  1. A mortgage that was taken out before 13 October 1987 will be considered grandfather debt. This is not limited, and all the interest you pay is fully deductible.
  2. A home purchased after 13 October 1987, and before 16 December 2017 is eligible for the $1 million limit, working out as $500,000 each if you are married and filing taxes separately.
  3. A home sold before 1 April 2018 is eligible for the $1 million limit only if a binding contract entered before 15 December 2017 that closed before 1 January 2018 and if the home was purchased before 1 April 2018.

Any homeowner that meets these criteria can deduct more than the $750,000 threshold. Be sure to speak to a financial advisor or someone in the tax office if you are unsure how to proceed.

There are a few forms that you need to complete the process, and it can be a little confusing, especially if you have never done it before. Speaking to your lender and advisors in the tax office can help make the process smoother for you.

What Loans Can I Do A Mortgage Interest Deduction With?

There are a few different ones out there when it comes to home loans, making the mortgage interest deduction process that bit more complicated! Thankfully, a few of these qualify for the mortgage interest deduction, allowing you to lower your tax!

Any of the following loans are suitable for this:

  • Home loan to buy a home
  • Home loan to build your home
  • Home loan to improve your home
  • Mortgage
  • Home equity loan
  • Line of credit
  • Second mortgage

Some of these loans will have slightly different criteria, and it’s worth checking this out before moving forward with the tax deduction.

You might also find that the rules in different states can vary. It’s always best to check this before proceeding and find yourself lost in a sea of forms!

Those who refinance their home can also benefit from the tax deduction. To do so, you will need to ensure that the loan meets any of the qualifications (buy, build, or improve) and that you used your home to secure the loan.

There can sometimes be additional paperwork or other forms that you will need to fill in, so don’t forget to ask for help if you need it!

Final Word

And there you have it; after $750,000, you lose your mortgage interest deduction! Since 2017, the limit has been lowered, and you cannot deduct interest over $750,000 on your home loan, whether it’s a mortgage or a line of credit. 

When deducting your interest, be sure to complete all the forms carefully and to reach out for help if you hit any issues along the way!

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