How to calculate the mortgage interest deduction if it is more than the maximum

The mortgage interest deduction is a positive benefit for homeowners. This itemized deduction allows homeowners to deduct mortgage interest from their taxable income, reducing the amount of tax they owe.

The current maximum mortgage interest deduction is based on Mortgage amount $750,000. Prior to the passage of the Tax Cuts and Jobs Act (TCJA) in December 2017, the maximum mortgage interest deduction was based on the mortgage amount of $1,000,000. Starting in 2018, the TCJA therefore has a marginally negative impact on homeowners living in more expensive parts of the country.

For example, the median home price in San Francisco is about $1.6 million. After putting down 20%, you are left with $1,280,000, most of which is usually borrowed through a mortgage. With a lower maximum mortgage interest deduction limit, the homeowner gets a lower deduction and has to pay more taxes.

Since I just filed my tax return, I’d like to give an example of how the mortgage interest deduction works. Specifically, I want to show how the mortgage interest deduction is calculated if you have a mortgage amount that is above the maximum limit.

In short, to calculate the mortgage interest deduction, divide the maximum debt limit by the remaining mortgage balance, then multiply that result by the interest paid to find the deduction.

Note: The tax extension deadline is Monday, October 16, 2023

First, get a 1098 mortgage interest statement

Download a Form 1098 mortgage interest statement from your mortgage lender. This is what the form looks like.

Form 1098 Example of Mortgage Interest Statement - How to Calculate the Mortgage Interest Deduction if it Exceeds the Maximum

Box 1 – This is the total interest you paid for the tax year. Does not include points.

Box 2 – The amount shown here is the remaining balance on your principal.

Field 3 – The mortgage origination date is the date you closed on the property and signed the contract.

Field 4 – If you have had any overpayments of interest refunded, they will be included in this field.

Field 5 – Mortgage Insurance Premiums (MIPs) are used by Federal Housing Administration (FHA) lenders to protect themselves against borrowers who are more likely to default. If you have an FHA-insured mortgage, these MIP fees will be listed here.

Field 6 – Mortgage points are fees paid to lenders in exchange for a lower interest rate. Generally, the points listed here are fully deductible in the year paid.

Field 7 – If the address of the property is the same as the address of the borrower, the box is either checked or the address is entered in column 8.

Field 8 – This is the address or description of the property securing the mortgage.

Field 9 – If there is more than one property in the loan, the total number is indicated here. The field can be empty if the loan is secured by only one property.

Field 10 – Additional information such as property taxes and insurance paid from escrow will be included in this space.

Field 11 – If the creditor acquired a mortgage during the calendar year, the date of acquisition is indicated here. Otherwise, it will remain blank.

If you have more than one qualified mortgage, you should receive a separate Form 1098 for each property.

Once you have your 1098, you enter the data into your tax software. From there it will print the form.

How to calculate the mortgage interest deduction if the amount is more than the maximum limit

Once you get Form 1098 Mortgage Interest Statement, you’ll need to itemize your deductions to claim the mortgage interest deduction. Since mortgage interest is an itemized deduction, you use Schedule (Form 1040), which is an itemized tax form in addition to the standard Form 1040.

This form also lists other deductions, including medical and dental expenses, taxes you paid, and charitable donations. The mortgage interest deduction part can be found on line 8 of the form. In this section, you enter the mortgage interest information found on your 1098.

In this example below, the average mortgage balance was $1,549,870, or $799,870 over the $750,000 mortgage balance threshold to deduct mortgage interest.

Therefore, you take $750,000 divided by the average balance of $1,549,870 to get 48.4%. You then multiply 48.39% by the total amount of mortgage interest paid that year, which in this example is $32,520. The end result is that this homeowner can only deduct $15,740 in mortgage interest expense against their income.

For more information on the deduction of interest from a housing mortgage, see IRS Publication 936.

Exceptions to the mortgage interest tax deduction limit:

There are three exceptions to the $750,000 mortgage interest tax deduction limit for married couples filing jointly, singles and heads of household. They are:

  • Any mortgage executed prior to October 13, 1987 is considered grandfathered and is not restricted. All interest you pay is fully deductible.
  • Any home purchased after October 13, 1987 and before December 16, 2017 still qualifies for the $1 million limit ($500,000 each if married filing separately).
  • Any home that was sold before April 1, 2018 qualifies for the $1 million limit – only if a binding contract was entered into before December 15, 2017 with a closing before January 1, 2018 and the home was purchased before April 1, 2018

Standard deduction or itemized deduction

To get the maximum home mortgage interest deduction, you’ll need to do the math and compare the amount to the standard deduction.

For tax year 2022, which will be the relevant year for tax payments for 2023, the standard deduction is:

  • $12,950 for single filing status
  • $25,900 married filing jointly
  • $12,950 for married filing separately
  • $19,400 for heads of household

So if your deduction for home mortgage interest, student loan interest, charitable contributions, medical expenses, and other deductions DO NOT total more than the standard deduction limits, then you would take the standard deduction. This way you get the most bang for your buck pay as little as possible in taxes.

If you choose the standard deduction, you won’t have to fill out multiple forms and document all of your deductions. Every taxpayer gets it. Expect the standard deduction amount to increase each year to keep up with inflation.

If you choose an itemized deduction, you need to prove the deductions by filling out additional forms. The IRS probably won’t audit your work, but if they do, you’ll need to provide certification.

A larger mortgage interest deduction in the future

I believe the mortgage interest deduction limit will go back to $1,000,000 in the future. House prices have risen significantly since the limit was lowered to $750,000 in 2018. If the government wants to make home ownership more affordable, then it will increase the mortgage interest deduction limit.

Since 2018, we’ve seen the estate tax threshold and Social Security tax benefits increase each year. Why shouldn’t the mortgage interest deduction limit also follow?

Inflation made almost everything go up. The government really wants it impaired availability of housing and create a greater nation of tenants? That doesn’t seem wise.

percent of total taxes paid by miscellaneous earners - half of taxpayers paid 97.7 percent of federal income taxes

Yes, some will say that the mortgage interest deduction is a tax break for rich people. However, roughly half of the US population lives in expensive coastal cities.

In addition, wealthier people pay a larger share of total taxes. As you can see from the tax foundation chart above, with the top 5% earning. who make up 38.1% of total adjusted gross income pay 62.7% of total income taxes paid.

Whether one takes the standard deduction or the itemized deduction, both are arbitrary tax breaks. Politicians who want to stay in power or get into power could easily get more votes by raising the mortgage cap to qualify for the interest deduction.

Questions and suggestions from readers

Do you think the mortgage interest deduction limit will increase in the future? What are other ways the federal government can make housing more affordable?

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