Owning a home is expensive, especially if you are still paying a mortgage. However, the Internal Revenue Service offers several tax deductions to help curb the cost of home ownership. For example, most homeowners are eligible to claim a deduction for the mortgage interest they pay during the year.
Claiming a Deduction
Mortgage interest is deductible if you pay it toward a loan on your first or second home. Interest paid toward primary mortgages, home equity loans, home-improvement loans and construction loans are deductible. To deduct mortgage interest from your taxable income, you must file IRS Form 1040 and itemize your deductions using Schedule A. Include the deductible amount of the mortgage interest you paid during the year on line 10 of Schedule A to claim the deduction.
Points and Penalties
According to IRS Publication 530, you can include discount points and certain penalties in your mortgage interest deductions. If you took out your loan during the tax year and paid discount points at closing, you can include this amount in your deduction. If you paid your home mortgage off early and incurred a prepayment penalty or you incurred a late payment penalty during the year, you can include the amount of the penalties in your mortgage interest deduction as well.
Most taxpayers can claim the full amount of their mortgage interest as a deduction, but the IRS imposed limits for taxpayers with extremely large mortgages or high income. For example, the maximum mortgage amount on which you can claim interest is $1,000,000 for a first or second home, as of 2012. You can also deduct interest for up to $100,000 on a second mortgage. If your adjusted gross income is more than $100,000 -- or $50,000 for those who are single or married filing separately -- you can deduct only part of your mortgage interest payments. The IRS provides a worksheet to help you figure the amount you can deduct.
Mortgage Interest Credit
Some people with low income can claim a tax credit based on the amount of mortgage interest they pay during the year. If you qualify for this credit, you will receive a mortgage credit certificate from your local or state government. It shows the percentage of interest you can claim as a credit. For example, if the certificate rate is 80 percent and your interest for the year equals $1,000, you can claim a mortgage interest credit equal to $800.