Could someone please explain the mortage interest deduction

[catmandu57]

in english. We are buying aour home and every year we get a statement of how much interest we have paid on our mortage. It's my understanding that if we claim that ammount it will be refunded to us, am I wrong on this?
I've been reading up on the irs site, and the tax person's secretary suggested that we wouldn't be eligible if we didn't pay at least 10.000 in interest per year, which sounds like bullshit to me.
How do I go about this? I'm filing 1040, and 1040A.

[BlueEyedSon]

1. Someone here may answer, but google and/or use the IRS site for

more authoritative info.

[Midlodemocrat]

2. It isn't refunded to you.

All deductions are subtracted from your total adjusted income and then you pay the taxes on that final amount. The deductions help to lower the amount you have to pay, but you don't get the full amount back.

The tax person's secretary is wrong. You can also deduct real estate taxes, personal property taxes, etc.,

Hope this helps a little.

[OKNancy]

3. What she said

Here are some quick answers

http://www.quicken.com/cms/viewers/article/taxes/53701

[dmkinsey]

4. I'll try a brief explanation

the interest on a mortgage is deductible BUT you have to go with ITEMIZED deductions instead of the standard deduction. I think the standard deduction is approx. $6400.
SO, if your mortgage interest and property taxes and all your other deductions total LESS than $6400 you would choose the standard deduction and skip the whole mortgage thing.

[bigscott]

7. and the interest

is deducted from your gross income. you pay taxes on your gross income. if you paid 10,000 in interest and are in the 25% tax bracket, you would have to pay 2500 LESS in taxes (or get 2500 BACK if you will). Paying 10,000 in interest does not mean you get the 10,000 refunded to you in taxes - i wish that was the case

[skids]

5. It's about the standard deductions and AMT

If you don't pay enough interest, combined with other deductable things like donations to charity, to be more than your standard deductions, it doesn't help you.

Likewise if you make too much money and try to deduct a whole lot of mortgage interest, then you may get clipped by the Alternative Minimum Tax.

[catmandu57]

6. Okay, thank you

We're just as well off taking the standard deduction.

[gratuitous]

11. Check your itemized deductions first, just to be sure

Between interest, property taxes, state income tax (if any), and charitable deductions, you might find that you have a little more to deduct than you thought.

[Egalitariat]

8. A couple of things

1) Your mortgage interest directly reduces your taxable income, not your tax liability. In round numbers:

Without the mortgage interest deduction:

Income $75,000
Deductions $ 0
Taxable Income $75,000
x Tax Rate 20%
Tax Amount $15,000


With the mortgage interest deduction. (assuming $5,000 in interest)

Income $75,000
Deductions $ 5,000
Taxable Income $70,000
x Tax Rate 20%
Tax Amount $14,000

In this obviously simplified example, your paying $5,000 in mortgage interest reduced your tax liability by $1,000.

Or you could have simply multiplied your marginal tax rate by the amount of interest you paid ($5000 * 20% = $1000).

2) However, if your total deductions (mortgage interest, charitable donations, etc) are less than the IRS allowed standard deduction for your filing status ($10,000 according to your tax secretary), you are better off taking the standard deduction than itemizing your actual deductions.

3) Any H&R Block accountant will be able to figure this out for you in about 10 minutes assuming you don't have a lot of other complex business dealings or investments.

[jody]

9. Applies only if you have deductions that exceed your standard deductions.

Suggest you read:

http://www.irs.gov/taxtopics/tc500.html

http://www.irs.gov/publications/p501/index.html and

[mtnsnake]

10. Your mortgage interest is one of you major deductions but it doesn't

get refunded to you. It just saves you some pretty good money in taxes you pay.

[mattclearing]

12. No, it is deducted from your taxable income.n/t

[Rainscents]

13. Your stander deduction is including you, your spouse, children's

mortgage interest, state income tax, property tax, etc... Example

you, your spouse and your children

$6,600.00 ($2,200.00 individual deduction)

Your mortgage interest,

$7,500.00

Property Tax

$1,500.00

Add up all three and you got $15,600.00 This comes off right from your total gross income.

[drbtg1]

14. You need to look at Schedule A

If you got a Form 1098 from your mortgage lender showing interest and points, enter it on line 10.
If you didn't get a Form 1098, enter interest on line 11 and points on line 12.

Here's the form:

http://www.irs.gov/pub/irs-pdf/f1040sab.pdf

As others have noted, other things can be entered too in order to see if an itemized deduction is better than a standard deduction. You have to look at the form to see what else you can enter (taxes, charitable donations, medical expenses above 7.5% AGI, theft and casualty losses, job expenses above 2% AGI)

[Gunit_Sangh]

15. I'll take a shot also

Suppose your mortgage payments total $10,000 for the year. Let's say your adjusted gross income is $75,000 and I'm also assuming a fixed rate mortgage.

Of that $10,000, part of it will be payment on the principle (the money you borrowed) and part will be interest, which is deductible. In the early years of your mortgage, the majority of your mortgage payment is towards interest. So for the first year, you may have $9,500 in interest and only $500 applied to the principle (these numbers are used as an example and may not reflect the actual numbers).

Half-way thru your mortgage, the interest payments, the deductible part, will be approximately half of your mortgage payment while the other half goes to principle. Towards the end of your mortgage, most of your payment goes towards principle and very little towards interest.

As you can see, as time progresses you will be paying less and less in interest payments, which are deductible, while your income is increasing (well ... maybe not in a GOP controlled economy).

When you do your taxes, you can deduct many things -- mortgage interest and property taxes being just a few. The interest you paid is subtacted from your adjusted gross income, along with all your other deductions to come up with a taxable income number. This is the amount you pay taxes on.

So in this example -- you would take $75,000 - $9,500 = $65,500 taxable income (minus any other deductions you may be eligible to take). The amount of money you *save* on your taxes is the amount of the deduction * the tax rate you're in. So if your tax rate is 20% then you would have given the bank $9,500 to save $1,900 on your taxes. Great deal heh? In some cases the deductions may drop you a tax bracket and make them more valuable, but they will ALWAYS be less than the deduction.

p.s. I am not a tax advisor and am not attempting to give tax advice.

[MindPilot]

16. I strongly recommend getting some tax software like Turbo-tax

It will take you step-by step through all your possible deductions in different filing scenarios, enables quick and easy (and fast!) electronic filing. And I'm told by a friend of mine who used to work for the IRS that since the companies who make tax software work closely with the IRS, filing with the software makes you almost audit proof.

Also if you have made any donations of stuff like clothes or furniture, I recommend getting something like "It's Deductible" to assess the value. It will be way more than you think. Also, anything you spend doing your taxes--software, e-filing fees, etc are deductible.

[Gormy Cuss]

17. I strongly second MindPilot's suggestion.

It's worth the price of TurboTax or TaxCut at least once because it walks you through the steps in a systematic way and helps you understand the tradeoff between itemized deductions and taking the standard deduction, and the cost can be as little as $20-$30 and may be deductible too.

[Silverhair]

18. Great suggestion.

I use it. Already have my taxes done for this year. Getting a refund via e-filing.

[newportdadde]

19. Get yourself a nice TurboTax program.

I've been using it for 5 years, no problems with it. As far as the mortgage deduction, using it depends on your other deductions. My personal advice is to get any mortgage paid off as soon as possible and forget about the mortgage interest deduction. Paying a back a dollar to save 30cents doesn't sound too good to me.