If you bought a home in 2024, congratulations! Welcome to homeownership, and potentially some changes in your tax bill, too. By owning a home, you may be able to lower the amount of federal income tax you owe, but much depends on some of the choices you made when you bought your home.
Of course, you have likely heard of the tax deduction for mortgage interest, and that owning a home means great tax savings. This may or may not be the case, though, since benefiting from the Mortgage Interest Deduction (MID) means you'll need to have total itemizable deductions that are in excess of the standard deduction made available to all taxpayers.
It is true, however, that the high home prices and high mortgage rates in 2024 make it more likely that more homeowners will itemize their returns to capture the MID, especially buyers in high-cost areas or those with high state and local taxes.
Like many tax-related things, whether there is a benefit that you can take advantage of or not can be summed up in two dreaded words: It depends.
The Mortgage Interest Deduction
Way back in 2017, the Tax Cuts and Jobs Act (TCJA) changed the game for deducting mortgage interest from your federal taxes. Specifically, the standard deduction was doubled at that time, and changes were made to the size of mortgages whose interest could be deducted. The TCJA also imposed limits on other taxes that can be part of an itemized return, making it more difficult for many to have enough cumulative deductions to get above the standard allowance. For some, the change was a benefit, as the new standard deduction was often higher than all the deductions many could muster; for others, it limited how far they could reduce their taxable income, resulting in a higher tax bill.
For tax year 2024, the personal exemption in place from the TCJA has risen to $29,200 for married couples filing jointly, $14,600 for single filers and $21,9000 for someone filing head of household. This means to capture the MID, your mortgage interest and other allowable deductions must exceed these amounts, otherwise it's not worth the time and effort to file an itemized tax return. If your itemized deductions are under these caps, taking the standard deduction would be more beneficial, not to mention simpler (and potentially less costly, if you are paying to have your returns prepared).
In addition to mortgage interest, one of the largest components of many itemized tax returns is the deduction for State and Local Taxes, aka "SALT". Previously not subject to limitation, the TCJA restricted the amount of SALT that can be used to lower a taxable income to only $10,000, regardless of the total amount a taxpayer might have paid. Homeowners who live in locations with high state income and property taxes may easily surpass this $10,000 limit, and capping it at $10,000 meant they needed more mortgage interest and other deductions to overcome the higher TCJA standard deductions.
That said, if the total of MID and SALT (plus any other itemizable deductions you may have) total more than $29,200 ($14,600 for a single filer), it's probably worth it to itemize your return, but there's no simple answer as to whether it is or isn't.
Here's an example. Consider a married homeowner filing jointly in a high-tax state who will hit the $10,000 SALT cap. This leaves a $19,200 gap to fill with mortgage interest (and potentially other deductible items) before they get over the standard deduction threshold available to them.
To do so with a mortgage with a rate of 6%, the couple would need a loan amount of $321,800 to have paid $19,200 in interest after making the first 12 payments. Of course, a loan with a higher interest rate requires a smaller loan amount to reach this level of interest cost; for example, with a rate of 7% and a term of 30 years, a mortgage of only $275,600 will hit that $19,200 interest total in its first payment year. Conversely, a higher loan balance can reach this amount of interest with a lower interest rate; a 5% mortgage rate would require a $386,600 loan amount.
It's worth keeping in mind that the first mortgage year and first calendar year you own your home will be different. If you closed on your home in June and made your first payment in July, you'll only have paid mortgage interest for half of your first calendar year of ownership, which may mean you won't have enough mortgage interest to file an itemized return until the second (and first full) calendar year of ownership.
Diminishing returns
Since interest costs diminish slowly over time, it may be increasingly difficult in future years to pay enough interest to make it worthwhile to itemize your tax return to capture the MID. For example, the amount of interest paid in the second year of the $321,800 loan example is only $18,957, so you would need another $243 in other deductible expenses to close the gap. As well, the standard deduction increases each year to account for inflation, so the second-year (and future years) gap will increase.
Interestingly, it may be easier for single borrowers to reach a place where itemization probably makes sense -- $10,000 in SALT expenses leaves just $4,200 in mortgage interest (and other items) to cover. With a 6% mortgage with a 30-year term, this happens with a loan amount of just over $70,400.
As such, single filers in high tax areas may have a greater incentive to itemize their returns. Of course, those same areas likely have high enough housing costs as to make it very challenging to be a single (income) homebuyer, too. So, if you're in a region where state and local taxes total $10,000 or more, any loan amount above $70.400 may make it worth itemizing to increase your income tax deduction. Note that this only applies to homeowners filing single; if you're a married homeowner filing separately, you are each allocated $5,000 for SALT deduction.
What if you're in a lower-tax state? Well, you'll need a larger loan amount to overcome any standard deduction threshold. Paying no state and local taxes at all isn't reality, but if it was, the example of the married couple filing jointly above would need a $451,550 loan at 6.5% to reach the $29,200 standard deduction with mortgage interest alone; for a single filer, it's $219,600 to hit the $14,200 mark.
Limits of mortgage-interest deductibility
The TCJA didn't only increase the standard deduction but also limited the size of mortgages whose interest can be deducted. Since December 15, 2017, deductible interest on mortgages has been limited to loan amounts of $750,000 (single or married filing jointly) or $375,000 each if married but filing separately. These replaced limits of $1,000,000 and $500,000 respectively.
Deducting "points" from a home purchase
Not all that favored when rates are low, paying points to lower a mortgage's interest rate is a simple way to make qualifying for a loan easier. A point -- a fee equal to one percent of the loan amount -- is technically a prepayment of mortgage interest, and is treated as mortgage interest for deduction purposes.
For many home buyers, points will be fully deductible in the tax year in which they were paid. The IRS has nine tests to determine the deductibility of points in the payment year; failing any one of them means they must be pro-rated over the life of the loan, as is the case in a refinance transaction.
The IRS notes "If you meet all of the tests listed above and you itemize your deductions in the year you get the loan, you can either deduct the full amount of points in the year paid or deduct them over the life of the loan, beginning in the year you get the loan. If you do not itemize your deductions in the year you get the loan, you can spread the points over the life of the loan and deduct the appropriate amount in each future year, if any, when you do itemize your deductions."
In short, you can only deduct the points if and when you file an itemized return, and if you don't do so in the first year, you'll only be allowed to pro-rate them (e.g. 1/30th of the amount paid for a 30-year term, 1/15th for a 15-year term, etc.).
Related: Essential tax questions and answers for homeowners
Are mortgage closing costs tax deductible?
Some mortgage closing costs are tax deductible, but most aren't. Here are fully-deductible costs that you can deduct when you close on a home purchase:
- Any sales taxes paid at closing
- Real estate taxes paid
- Any mortgage interest paid at closing (e.g. per diem interest)
- Loan origination fees calculated as a percentage of the loan amount (points)
That said, there are a lot of other costs and up-front expenditures that aren't tax deductible when you buy a home. These include, but aren't limited to:
- Utility account set up charges
- Any real estate or mortgage broker commissions paid
- Appraisal costs
- Inspection fees
- Homeowners, Flood or Title insurance costs
- Credit report fees
- Transfer taxes
- HOA fees
- Attorney fees
In general, if it's a cost that isn't interest, property or sales taxes, it probably isn't deductible from your tax bill.
Can I write off private mortgage insurance premiums?
Not for 2024, at least not so far. Congress originally allowed homeowners to deduct mortgage insurance premiums as part of the Mortgage Forgiveness Debt Relief Act of 2007. However, the deductibility of mortgage insurance premiums isn't a permanent part of the tax code, so the ability to deduct them relies on routine re-authorization by Congress, and there is no guarantee that they will do so.
If PMI deductibility should be re-authorized, the IRS allows three years from the date you originally filed to file an amended return via form 1040-X, if you previously itemized deductions on 1040 Schedle A, and it's worth the time to recover the income offset any MIP or PMI premium payment would provide.
As a home buyer, you certainly should take advantage of every homeownership tax deduction for which you qualify, and there may be more than what is outlined above, such as energy-efficiency credits. This is why, at least in your first year of ownership, it might be worth it to consult with a tax professional. If nothing else, it can help you at least establish a benchmark to use for filing in subsequent years, whether that's sharpening the pencil and filing an itemized return or just taking the standard deduction available to you.
Ultimately, is it worth it to itemize your return or not? You have to run the numbers to find out, or let your tax professional figure it out for you. If it is worth it, you'll be filing a 1040 Schedule A.
Whether you decide to hire a professional or give it a go yourself, it's a good idea to at least familiarize yourself with IRS Publication 936 where all the twist and turns of tax policy on home buying and home owning are detailed. Keep in mind that tax policy isn't written in stone and so is subject to change, and that the rules in place since the Tax Cuts and Jobs Act of 2017 are slated to expire this year -- unless extended or made permanent.
Related: What homeowners need to know before filing their tax returns