By Yigang Xu, CPA
XU CPA, LLC
Greenville, SC
www.mygreenvillecpa.com

The federal tax code permits taxpayers who itemize to claim a deduction for the mortgage interest they pay on their own homes. This is a very important tax deduction, especially for higher income taxpayers. According to the US Treasury Department, this deduction is the 3rd largest individual tax preferences in 2014, amount to 101 billion dollars.

To deduct your mortgage interest expense, there are a few general rules:

• You must file your individual return and itemize deductions on Schedule A (Form 1040)
• The mortgage must be a secured debt on your qualified home (primary residence and second home)
• You can deduct interest on no more than $1,000,000 of mortgage incurred to buy, build and improve your home, also called home acquisition debt.
• You can also deduct interest on no more than $100,000 of mortgage incurred other than to buy, build and improve your home, also called home equity debt.

Who gets the most benefit?

On the face of it, this deduction is set to encourage home ownership for everybody, but in reality, it is mostly claimed by higher or upper income taxpayers. Because first and foremost, a taxpayer must itemize deductions on Schedule A to even claim this interest expense, and according to the numbers from IRS, itemized deductions are most likely claimed by upper-income tax payer, in a recently publication by the Tax Foundation, the percentage of itemized deductions is 48% for income class (AGI) between $50,000 to $75,000, while 95% for income class between $200,000 to $300,000.

Summary: 

Tax code allows taxpayer to deduct interest expense on their qualified home mortgage up to 1 million dollars on home acquisition debt, and up to $100,000 on home equity debt, it is the 3rd largest individual tax preferences according to the Treasury Department, estimated at 101 billion dollars for 2014, this deduction chiefly benefits higher income taxpayers.

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