# How do I Calculate Tax Savings on Mortgage Interest?

The mortgage interest deduction lets you write off the interest you pay on a large chunk, if not all, of your mortgage debt. Estimating how much your mortgage interest will save on your taxes can help you make a better decision about how much you can afford to spend on your mortgage. For example, if you'll pay an extra \$1,000 over the year compared to renting, but you'll save an extra \$5,000 because of the interest deduction, the mortgage becomes more affordable. However, since mortgage interest is an itemized deduction, you can't claim it unless you're willing to part with your standard deduction.

Step 1

Calculate your mortgage interest deduction. If you have less than the annual limit in mortgage debt, you can deduct all of your interest. As of 2012, the limit is \$1 million of debt for most filers, but \$500,000 for joint filers filing separately. Because these numbers are so high, many filers won't have to worry about the limits. If you exceed the limit, you can only deduct the portion of your interest paid that is charged on the debt up to the limit. For example, if you have \$2 million in mortgage debt and you file a joint return, you can deduct half your interest.

Step 2

Estimate your taxable income for the year by subtracting any adjustments to income or exemptions you're eligible to claim from your gross income. For example, if you have \$150,000 of income and \$20,000 of exemptions and adjustment to income, your taxable income is \$130,000.

Step 3

Figure your income tax bracket by comparing your taxable income with the tax brackets for the year. The Internal Revenue Service publishes these in Publication 17. For example, if you're married filing jointly in 2012 and have a taxable income of \$130,000, you fall in the 25 percent tax bracket.

Step 4

Multiply your tax bracket by your mortgage interest deduction to calculate your tax savings. For example, if you can deduct \$12,000 in mortgage interest and you fall in the 25 percent tax bracket, multiply 12,000 by 0.25 to find you'll save \$3,000 on your taxes.

#### Tip

• If your mortgage interest deduction drops you into a lower tax bracket, your tax savings will be smaller. For example, say you're only in the 25 percent tax bracket by \$6,000 and you claim a \$12,000 mortgage interest deduction. The first \$6,000 of your deduction results in savings of 25 percent, or \$1,500. But the last \$6,000 would save you only 15 percent, or \$900. So your total savings would be \$2,400.