Certain elements such as property taxes and mortgage interest of your mortgage payments are tax deductible. Under some situations, you may be allowed to deduct certain expenses as well, but your mortgage’s principal payments are not deductible.

Mortgage Interest Deductions

The biggest tax break homeowners get is the mortgage interest deduction. However, you must understand the difference between a credit and a deduction. A tax credit will reduce your taxes by the full sum of the credit. For instance, if new homeowners get a credit of $10,000, then their total tax amount due is reduced by $10,000. On the other hand, if you made payment of $10,000 in mortgage interest and fall in the 25 percent tax category, then your actual mortgage interest deduction will reduce your taxes by $2,500. i.e. 25 percent of $10,000 (total mortgage interest paid). You will get more in deduction if you pay higher rate of tax. You need to use Schedule A with IRS Form 1040 for listing your tax deductions.

Particulars of Mortgage Interest Deduction

The interest deduction is restricted to your first mortgage debt of up to $1,000,000, or $500,000 in case you’re married and are filling taxes separately. You are allowed to deduct interest only on the first $1,000,000 if your mortgage is greater than one million dollars. If you got a loan or line of credit on home equity, you can get the interest deduction on $100,000 only. Interest deductions are also allowed on second or additional homes such as vacation homes, but are capped by the million-dollar limit. In case you paid points for reducing the rate of interest when you received the mortgage, you can deduct them all straight away when you buy a new home. For refinancing, you are allowed to deduct the points over the term of your loan.

Prevent Mortgage Insurance Deductibility

Private Mortgage Insurance (PMI) is deductible if the contract for the insurance was made after 2006. However, the deduction amount can be reduced or removed in case you gross income is more than $100,000 or $50,000 for married couples who file taxes separately. Property tax on real estate paid to the authorities is deductible.

Rental Property Related Deductions

Principal payments on a rental property in your name don’t qualify for deduction, but most of the other expenses are deductible. Real estate taxes, mortgage interest, and homeowners’ insurance are tax deductible and set off income from rent. Land owners are required to file the details of rent received and expenses incurred using a Form 1040 Schedule E.