No Effect If You Do Not Itemize

• No income tax deduction can be claimed for mortgage interest if you do not itemize your income tax deductions. When you itemize, you can't claim the standard deduction. The amount of your standard deduction depends on your filing status, and it varies each year as the cost of living index changes. For example, in 2011 the standard deduction equals $5,800 for singles and $11,600 for married couples filing jointly. However, if your mortgage interest deduction and other itemized deductions, such as your state and local income taxes, exceeds your standard deduction, you will save money by itemizing.
  
  

Calculating the Mortgage Interest Deduction

• For most people, all of your mortgage interest will be deductible on your taxes. However, if you have a mortgage for more than $1 million (or $500,000 if married filing separately), you cannot deduct the entire amount. To find the deductible amount, divide the maximum mortgage amount by your mortgage balance and multiply the result by the amount of mortgage interest paid. For example, if you have a $2.6 million mortgage that costs you $160,000 in interest and you are single, divide $1 million by $2.6 million to get 0.3846153846153846. Then multiply 0.3846153846153846 by $160,000 to find you can deduct $61,538.46.
  
  

Impact on Your Taxes

• The mortgage interest tax break is a deduction, not a credit, so the amount that you will save on your income taxes depends on your income tax rate. The higher the rate, the more your mortgage interest deduction saves you on your income taxes. For example, if you pay $20,000 in mortgage interest and pay a 26 percent tax rate, the deduction would save you $5,200. However, if you pay a 36 percent tax rate, you would save $7,200.
  
  

Tax Filing Effects

• When you file your taxes, you have to use Form 1040, because it is the only tax return form that allows you to itemize. When you itemize your deductions with Schedule A, report your mortgage interest amount on line 10. This amount will be combined with your other itemized deductions and then will decrease your taxable income. When you mail in your income tax return, enclose Copy A of the Form 1098. You may keep Copy B for your records.