How to Calculate the Home Mortgage Interest Deduction (HMID)

Nov 15, 2022 By Susan Kelly

Among the many widespread tax benefits in the United States is the interest deduction on a home mortgage. It is highly regarded among real estate agents, homeowners, would-be homeowners, and even accountants. Indeed, myths frequently surpass reality in terms of quality.

Homeowners who itemize their taxes can deduct the interest they pay on a mortgage loan of up to $750,000. Due to changes made by the Tax Cuts and Jobs Act (TCJA) of 2017, the maximum loan size for which mortgage interest can be deducted has been lowered to $750,000 (from $1,000,000).

Thanks to the TCJA's roughly twofold increase in basic deductions, many taxpayers no longer need to itemize. To most homeowners, the mortgage interest deduction is now worthless when filing their taxes.

Allowance for Mortgage Interest Present

Everything was different before the Tax Cuts and Jobs Act of 2017 (TCJA). As of 2018, the limit on the amount of a mortgage loan on which interest can be deducted was lowered from $1 million to $750,000. It quadrupled the standard deduction and made it unnecessary for many taxpayers to itemize because they could no longer claim the personal exemption and itemize deductions.

According to projections, 135.2 million taxpayers will choose the standard deduction in the first year after the TCJA goes into effect. As a comparison, it was predicted that 20.4% of taxpayers would itemize, with 16.46% of those filing to deduct mortgage interest.

The fallacy originates from two false beliefs: first, that all homeowners receive a tax break, and second, that the interest paid on a mortgage directly reduces a taxpayer's taxable income.

You'll be eligible for a tax break.

The vast majority of homeowners do not benefit in any way from the mortgage interest tax deduction, despite widespread belief otherwise. Homeowners who do not itemize their deductions when calculating their taxable income will not be eligible for this deduction. Mortgage interest, property taxes, and some medical expenses can all be considered by itemizing. The ability to deduct mortgage interest is commonly highlighted as a financial inducement to buy a home because it is typically the largest of these expenses a taxpayer spends.

As before, itemizing deductions may seem appealing in theory, but once the TCJA was passed, it became clear that doing so was not in anyone's best interest.

The standard deduction for individuals and couples filing separately in 2022 is $12,950 and will increase to $13,850 in 2023. In 2022, a household head may expect to bring in $19,400 (this rises to $20,800 in the following year). The standard deduction for a married couple filing jointly will be $25,900 in 2022 and $27,700 in 2023.

Mortgage interest payments provide no tax benefit to taxpayers who do not itemize deductions because their total deductions do not exceed the standard deduction thresholds.

Misunderstandings Are That The Deduction

The second of the five common misunderstandings is that the deduction will be pretty significant. Those fortunate enough to be able to deduct their mortgage interest payments from their taxable income may find that their deduction is only a tiny portion of their actual interest costs. The deduction is not a tax credit, so some calculation is necessary to understand the situation.

You don't get a dollar's worth of tax savings for every dollar spent, but you get a little fraction of one. The mortgage interest deduction lessens taxable income by a percentage equal to the taxpayer's marginal tax rate, while a credit decreases taxes owing by the same amount.

To use a simplified example, a taxpayer who pays an individual income tax rate of 24% and has mortgage interest expenses totaling $12,000 would be able to subtract $12,000 from income tax liability, resulting in a savings of $2,880. This means that the homeowner forked over $12,000 in interest to the bank in exchange for a tax break of less than $2,000.

One Way That Works Better

Even if the couple does not have a mortgage, they will still be eligible to take advantage of the standard deduction and its associated tax benefits. Instead of saving $3,336 thanks to your tax deduction for paying $12,000 in real money to the bank in mortgage interest, you'd be out that much. It's not worth the hassle of itemizing deductions to claim the mortgage interest tax break; the standard deduction is much larger.

No one, not even those in higher tax brackets, would save money unless they also itemized numerous other large deductions. At the 35% individual tax rate, a person who pays $12,000 in mortgage interest can deduct only $4,200. That's not quite as much as the taxpayer would get if they claimed the standard deduction instead. In the table below, we can see the "advantage" of the mortgage interest deduction.

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