Mortgage Interest Deduction The mortgage interest deduction encourages homeownership by allowing you to deduct when filing your federal income tax 100 percent of the interest paid on the home mortgage
The mortgage company reports to the IRS all the mortgage interest you paid in a tax year (January 1 to December 31) and sends you a statement of total interest paid on a Mortgage Interest Statement, Form 1098.
The principal portion of the mortgage is not tax deductible.
Mortgage interest can substantially reduce your tax liability.
Step 1 Complete IRS form 1040 by inputting filing status, income and deductions on the appropriate lines. Use the standard deduction, or, if you itemize on Schedule A, use your total itemized deductions, less mortgage interest. Calculate tax or refund due using your taxable income and the IRS-provided tax charts. Call this total A.
Step 2 Prepare a second 1040, using your mortgage interest (reported to you on Form 1098) as part of total itemized deductions. Use the tax charts and your taxable income to determine tax or refund due. Call this total B.
Step 3 Subtract total B from total A. The difference is your tax savings due to the mortgage interest deduction. For example, if you owed $15,000 in taxes without the mortgage interest deduction (A) and $3,000 with the mortgage interest deduction (B), your tax savings is $12,000 ($15,000 minus $3,000).