How Much of My Mortgage Payment is Tax Deductible?
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How much of your monthly mortgage payment is tax deductible?
The short answer is more than you might think, but not as much as you might hope.
Depending on how your mortgage is set up, your monthly payment likely includes principal, interest, taxes, and insurance, also known by the acronym PITI.
Let’s take a look at each category to see whether there’s a deduction that can lower your taxable gross income:
Principal – No
The principal is the total amount you borrow from the lender. It’s not deductible.
The portion of your house payment that goes toward the principal is generally smaller during the first years of the mortgage term but increases as the term progresses.
Interest – Yes
During the early years of a mortgage, this often makes up a larger part of your monthly payment.
The good news is you can deduct it from your gross income, according to the Internal Revenue Service’s Tax Information for Homeowners. This is one of the most beneficial deductions, as it applies to mortgages with balances of up to $1 million.
Your mortgage company should have mailed you a statement, Form 1098, that outlines how much you paid in principal and interest. You should report that information on your tax return.
Real estate taxes – Yes
Property taxes on your home and the land it sits on can be deducted.
If you bought your home during the tax year, you likely paid property taxes at closing. Your closing statement should have the amount you paid. This generally is the only part of your closing costs that is deductible.
If you didn’t buy the house during the tax year, then you likely paid property taxes to your county, city, or both. The taxing authorities should have sent you a statement of how much you paid on Form 1098 in Box 4.
Insurance – No and Yes
Your home insurance is not deductible, nor is your title insurance.
Home insurance is what protects your house and its contents from fire, wind, and other specified perils. Your mortgage company requires you to purchase coverage, but the premiums – often bundled into your monthly mortgage payment – are not deductible.
Title insurance is a policy that guarantees the title for a piece of property is valid. It is often required by your lender but is not deductible.
Private mortgage insurance, however, is deductible.
Most lenders require private mortgage insurance, or PMI, when a buyer cannot make a down payment of at least 20% of the purchase price. The coverage protects the lender in case you default on the loan. The amount you pay is deductible and should show up on your Form 1098 from your mortgage company.
The outlook for next year
The private mortgage insurance just mentioned expired when the calendar year turned to 2014. You can still use it for the 2013 tax year, but as things currently stand, it won’t be available when you file next year.
In fact, changes to – and even the elimination of – the mortgage-interest deduction are discussed nearly every year. No one expects it to go away immediately, but it’s worth keeping an eye on.