2016 Mortgage Deduction: What You Should Know

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There are many tax breaks associated with owning a home, and one of the most important is the ability to deduct the interest you pay on your mortgage. The main provisions dealing with the mortgage deduction aren't currently slated to change in 2016, letting homeowners continue to benefit from this key tax-saving strategy. Let's take a closer look at the mortgage interest deduction and some of the other mortgage-related expenses that are eligible for favorable tax treatment.

The basics of the mortgage interest deduction

In general, homeowners are allowed to take an itemized deduction for mortgage interest they incur on their homes. For mortgages and other financing that's secured by either your primary residence or a second home and used to buy, build, or improve the property, you're allowed to deduct interest on loans totaling up to $1 million unless you're married and file separately, in which case the corresponding amount is $500,000.

You can also take out additional mortgage debt for purposes other than buying, building, or improving your home, but a lower limit applies. For these loans, which the IRS refers to somewhat confusingly as home equity debt, interest is deductible on principal balances of up to $100,000 (or $50,000 for married taxpayers filing separately).

Are points deductible?

One of the most confusing aspects of the mortgage interest deduction is whether upfront points are deductible. In general, points are deductible immediately if you use the loan to buy or build your main home and if the amount of points paid is consistent with industry practice in your area. That makes points on most purchase loans eligible for immediate deduction but makes it far harder to deduct points you pay when you refinance an existing mortgage.

If you're not allowed to deduct your points when you pay them, you can still claim a deduction for them over the life of the loan. The IRS provides a schedule under which you can deduct a certain fraction of your points each year, letting you slowly get the tax benefit of having made the upfront interest payment.

What about home mortgage insurance?

Since 2007, homeowners have been allowed to deduct what they have to pay for mortgage insurance as if it were mortgage interest. This provision applies to mortgages where the associated insurance policy was obtained in 2007 or later.

The problem, though, is that this provision is one of many that Congress has to renew annually. As of mid-December, lawmakers hadn't yet completed its annual exercise of extending the expiration date of the provision. If the measure isn't extended, then mortgage insurance premiums paid in 2015 won't be deductible. Few people expect problems in renewing the provision, but it does have a cost to the federal government and could be a target among budget-conscious lawmakers.

Homeowners: get all your tax breaks

Finally, it's important to understand that homeowners are also eligible for other deductions. Property taxes for real estate are generally deductible, and credits for various expenses on improvements related to energy efficiency are available. Depending on your tax situation, the total amount of tax breaks you can qualify for can be large enough to sway you toward home ownership.

Owning a home brings with it a lot of tax issues to keep in mind. The deductibility of mortgage interest is a huge incentive that spurs many buyers to make their home purchases, and despite some threats to limit or repeal the mortgage interest deduction, it's unlikely to happen in the near future without some sort of large-scale tax reform effort that changes the broader set of tax laws dramatically.

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The article 2016 Mortgage Deduction: What You Should Know originally appeared on

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