How to Get Tax Savings on Your Mortgage

Owning a home can provide financial advantages, particularly when filing your annual income taxes. Certain expenses associated with homeownership can be deducted, potentially lowering your tax liability. The process involves evaluating your total deductible expenses against a government-set threshold to determine the most advantageous filing method.

The Standard Deduction vs Itemizing Your Expenses

Every taxpayer has a choice between taking the standard deduction or itemizing their deductions. The standard deduction is a fixed dollar amount that you can subtract from your adjusted gross income (AGI). For the 2025 tax year, the standard deduction is $30,000 for married couples filing jointly, $15,000 for single individuals and those married filing separately, and $22,500 for heads of household. These amounts are adjusted annually for inflation, but the current higher deduction levels are scheduled to expire after 2025.

Itemizing is the process of listing out all of your individual deductible expenses. Homeownership provides some of the most significant itemized deductions, but there are others, such as charitable contributions and certain medical expenses. A taxpayer benefits from itemizing only when the sum of their individual deductions is greater than the standard deduction amount for their filing status. If your total itemized deductions are less than the standard deduction, you would receive a larger tax benefit by taking it.

Consider a married couple filing jointly with total itemized deductions of $32,000. Since this amount is greater than their $30,000 standard deduction, they would save more on their taxes by itemizing. However, if their total itemized deductions were only $25,000, they would be better off taking the standard deduction.

Deductible Homeownership Expenses

A large portion of a homeowner’s deductible expenses comes from costs related to their mortgage and property. The specific rules and limits for these deductions are important for homeowners to understand to accurately calculate their potential tax savings.

Mortgage Interest

You can deduct the interest paid on mortgage debt used to buy, build, or substantially improve your main home or a second home. For mortgages taken out after December 15, 2017, the deduction is limited to the interest paid on the first $750,000 of mortgage debt ($375,000 if married filing separately). For mortgages that originated before this date, the higher limit of $1 million ($500,000 if married filing separately) still applies. This $750,000 limit is scheduled to revert to the $1 million threshold after the 2025 tax year.

This qualifying debt is known as home acquisition debt. Interest on home equity loans or lines of credit is also deductible, but only if the funds are used for the same purposes of buying, building, or substantially improving the home that secures the loan. If the proceeds are used for other personal expenses, such as paying off credit card debt, the interest is not deductible.

Mortgage Points

Mortgage points are a form of prepaid interest that a borrower can pay to the lender to lower the mortgage’s interest rate. In some cases, you can deduct the full amount of the points in the year they are paid. To do this, the loan and points must meet several IRS criteria.

• The loan must be for your primary residence.
• The payment of points must be an established business practice in your area.
• The points paid must not be excessive for the region.
• The points must be calculated as a percentage of the mortgage and be clearly itemized on your settlement statement.
• You must have provided funds at or before closing that are at least equal to the amount of the points.

If you do not meet all these criteria, you cannot deduct the points all at once. Instead, you must deduct them ratably over the life of the loan. For example, on a 30-year mortgage, you would deduct 1/30th of the points’ cost each year.

Property Taxes

State and local property taxes paid on your home are a deductible expense. However, the Tax Cuts and Jobs Act of 2017 introduced a limitation. The total deduction for all state and local taxes, which includes property, income, and sales taxes, is capped at $10,000 per household per year ($5,000 for married individuals filing separately). This limitation is scheduled to expire after the 2025 tax year.

This State and Local Tax (SALT) deduction cap means that even if you pay more than $10,000 in property and state income taxes combined, you can only deduct a total of $10,000 on your federal return. This has reduced the benefit of itemizing for many taxpayers, particularly those in areas with high property and income taxes.

Mortgage Insurance Premiums (PMI)

Private mortgage insurance (PMI) is often required by lenders when a homebuyer makes a down payment of less than 20%. The tax deduction for PMI premiums has a history of expiring and being renewed. However, the deduction for mortgage insurance premiums has expired and is not available for the 2025 tax year. Because the availability of this deduction changes, homeowners paying PMI should check the tax law for the specific year they are filing.

Required Documentation for the Deduction

To claim homeownership deductions, you must have the correct documentation. Lenders are required to send specific forms that report the amounts you’ve paid, which you will use to fill out the necessary tax schedules.

Form 1098, Mortgage Interest Statement

The primary document you will receive is Form 1098, the Mortgage Interest Statement. Your lender must send you this form if you paid $600 or more in mortgage interest during the year. This form provides a summary of the key amounts you paid that may be deductible.

Box 1 of Form 1098 shows the total mortgage interest you paid during the year. Box 6 reports any points you paid on the purchase of your principal residence. Other boxes may show information like your outstanding mortgage principal or mortgage insurance premiums paid, though the PMI deduction is not currently active.

Schedule A, Itemized Deductions

You use Schedule A (Form 1040) to officially claim your itemized deductions. The information from your Form 1098 is transferred directly to this schedule. The mortgage interest you paid is entered on Line 8a of Schedule A. If you paid mortgage points that were not included in Box 1, you would report them on Line 8c.

Your property taxes are combined with your state and local income or sales taxes and reported on Line 5, subject to the $10,000 SALT cap. After you have determined that itemizing is your best option, the completed Schedule A must be submitted to the IRS along with your Form 1040.