Does Form 1098 Mortgage Interest Increase Your Tax Refund?

Understanding how Form 1098, which reports mortgage interest paid, impacts your tax refund is important for homeowners navigating tax season. This form can reduce taxable income, potentially leading to savings, but its benefits depend on several factors.

To maximize refunds, it’s essential to understand the deductions and credits associated with mortgage interest.

Form 1098 Mortgage Interest

Form 1098, issued by lenders, details the mortgage interest paid during the tax year. The IRS allows deductions for interest on loans secured by a primary or secondary residence, provided the loan meets specific criteria. For 2024, the Tax Cuts and Jobs Act (TCJA) limits the deduction to interest on loans up to $750,000 for those married filing jointly or $375,000 for married filing separately.

The form includes information like the amount of interest paid, points paid on a home purchase, and mortgage insurance premiums. Points paid on a loan used to purchase or improve a primary residence may be deductible in the year they were paid if certain conditions are met. This can be especially beneficial for new homeowners who often pay significant points upfront.

Standard Deduction vs Itemizing

Homeowners must decide between taking the standard deduction or itemizing their deductions, as this choice impacts taxable income and potential refunds. For 2024, the standard deduction is $13,850 for single filers, $27,700 for married couples filing jointly, and $20,800 for heads of household.

Itemizing involves listing eligible expenses—such as mortgage interest, property taxes, and charitable contributions—to determine if their total surpasses the standard deduction. Homeowners with significant mortgage interest may benefit from itemizing, but doing so requires careful record-keeping and documentation.

Deduction Limits Under Current Tax Regulations

The TCJA caps mortgage interest deductions to interest on the first $750,000 of mortgage debt for loans taken out after December 15, 2017. For married couples filing separately, the cap is $375,000. A homeowner with a $1 million mortgage, for example, can only deduct interest on the first $750,000.

Homeowners should also be aware of the Alternative Minimum Tax (AMT), which may limit the ability to deduct certain expenses, including mortgage interest. High-income taxpayers must calculate their liability under both systems and pay the higher amount, which can negate some benefits of mortgage interest deductions.

How Taxable Income Affects Your Potential Refund

Taxable income—calculated by subtracting deductions and exemptions from gross income—determines the taxes you owe. Reducing taxable income through deductions like mortgage interest can lower your tax liability and potentially increase your refund. For instance, falling into a lower tax bracket due to deductions can significantly impact the amount owed or refunded.

The progressive federal tax system means higher taxable income can result in higher marginal tax rates. In 2024, federal tax rates range from 10% for income up to $11,000 for single filers to 37% for income exceeding $578,125. Other income, like dividends or capital gains, may be taxed differently and impact overall tax planning.

Possible Credits and Adjustments

The mortgage interest deduction is a valuable benefit, but homeowners may also qualify for other tax advantages. Credits, unlike deductions, reduce tax owed directly and can have a significant impact on refunds.

One example is the Residential Energy Efficient Property Credit, which allows taxpayers to claim 30% of the cost of renewable energy systems like solar panels or geothermal heat pumps. For a $20,000 solar installation, a homeowner could receive a $6,000 credit, reducing their tax liability. However, this credit is non-refundable, meaning it can reduce taxes owed to zero but won’t generate a refund beyond that.

Mortgage insurance premiums, often treated as a deduction, are technically an adjustment that lowers adjusted gross income (AGI). A lower AGI can increase eligibility for other credits, such as the Child Tax Credit or the Earned Income Tax Credit.

Factors That May Reduce the Benefit

Certain factors can reduce the value of mortgage interest deductions and related tax advantages. For example, the deduction for mortgage insurance premiums begins to phase out for taxpayers with an AGI exceeding $100,000 ($50,000 for those married filing separately) and is eliminated entirely at $109,000. High-income earners may also face limitations on other deductions or credits, reducing the overall tax benefits of homeownership.

State and local tax (SALT) deduction limits also impact homeowners. The TCJA caps the SALT deduction at $10,000, including property taxes. For homeowners in high-tax states like New York or California, this cap can significantly limit the combined benefit of itemizing deductions, especially when property taxes alone exceed the limit. Additionally, homeowners nearing the end of their mortgage term may find their interest payments have decreased, making the standard deduction a more appealing option.