How to Estimate Tax Deductions on a Monthly Mortgage

Written by phil m. fowler
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How to Estimate Tax Deductions on a Monthly Mortgage
Managing mortgage payments can be a balancing act. (Hemera Technologies/ Images)

The mortgage tax deduction is one of the most valuable financial benefits to owning your own home. On your annual income tax return you can deduct the amount of all interest paid on a mortgage on your primary residence. This is especially valuable during the first 10 to 15 years of a mortgage when interest typically far exceeds principal each month.

Skill level:
Moderately Easy

Things you need

  • IRS Form W-4
  • IRS Form 1099-INT from your mortgage lender
  • Mortgage amortisation schedule

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    Calculating Tax Deduction for Home Mortgage Interest

  1. 1

    Find a copy of your mortgage amortisation schedule. This schedule will show you what percentage of each one of your payments is for interest.

  2. 2

    Using your amortisation schedule, add up the total interest that you will pay during the current year. Because the amount of interest you pay will slowly diminish with each principal payment that you make, this amount will change from month to month and year to year.

  3. 3

    Get a copy of IRS Form W-4. The W-4 is a withholding estimate worksheet that allows you to control how much your employer withholds in taxes from each one of your paychecks.

  4. 4

    Fill out the Deductions and Adjustments Worksheet on page 2 of the W-4. On Line 1 of that work sheet, list the total of all of your anticipated itemised deductions, including your home mortgage interest for the year.

  5. 5

    Locate your IRS Form 1099-INT from your mortgage lender. Your lender is required by law to send you a Form 1099-INT in January of each year.

  6. 6

    Refer to box number 8, labelled Tax-Exempt Interest, for the annual interest that you can claim as an itemised deduction on your tax return.

Tips and warnings

  • Many people mistakenly do not calculate the W-4 properly, which means they pay too much money in taxes on each paycheck during the year. At the end of the year they typically get that money back in a tax return, but in the meantime, they have lost the use of that money. In essence, if you don't plan ahead with a W-4, you make an interest free loan to the IRS for the year.
  • You can only claim a mortgage interest tax deduction if you itemise your deductions. In other words, if you know you will claim the standard deduction, there is no reason to estimate your monthly mortgage payments. But, you should always add up your itemised deductions and compare the total against the standard deduction, and then take whichever is higher.

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