Although mortgage interest is a common tax deduction, it is usually reported as an itemized expense, which is a below-the-line deduction. However, if you are self-employed and claim business expenses on Schedule C of your tax return, you may be able to deduct all or part of the mortgage interest you pay. In this instance, the mortgage interest you claim as a deductible expense would be an above-the-line deduction.
In some cases, you can qualify for a tax break without having to itemize deductions. Above-the-line deductions, which are actually adjustments to your income, are subtracted from your gross income when figuring your adjusted gross income. By claiming one or more of the dozen or so adjustments listed on Form 1040, you can cut your taxable income, decreasing the amount of tax you owe. You may not claim the mortgage interest you pay as one of the adjustments to income listed on page 1 of Form 1040 or Form 1040A.
Below-the-line deductions are those that you subtract from your adjusted gross income to figure your taxable income. While above-the-line deductions generally offer more tax benefits, below-the-line deductions can also reduce your tax liability. Below-the-line deductions include the personal exemptions you can claim for yourself and your spouse if you are filing a joint income tax return. You may also take one exemption for each dependent you claim. In addition, you can either itemize deductions or take the standard deduction for your filing status. Itemizing deductions will lower your tax only if the total of your itemized deductions is more than your standard deduction. You can deduct mortgage interest on Form 1040, Schedule A along with the other expenses you claim as itemized deductions.
Itemizing certain expenses makes it easier to get the total of your itemized deductions above your standard deduction. Itemized deductions are below-the-line deductions that you subtract from your adjusted gross income to arrive at your taxable income. In many cases, the amount of mortgage interest you pay helps to increase your itemized deductions higher than your standard deduction amount. If you have a home mortgage that’s still in its early years, most of the interest you pay on your mortgage loan is deductible. Longer-term mortgages give you a valuable tax break because you will be making payments that include mostly interest for more years than with a shorter-term loan. You may also be able to deduct the interest you pay on a home equity loan.
Business expenses you claim as deductions on Schedule C, Profit or Loss from Business, are above-the-line deductions that you deduct them from your gross income. If you are self-employed and work from home, you can take a home office deduction, in which case, some of your expenses are partially deductible. Use Form 8829 to calculate the amount of the mortgage interest you pay that you can deduct as a business expense and enter on Schedule C. To figure the amount of your mortgage interest that you can deduct, you must determine how much of the total area of your home you use for business. You can also deduct on Schedule C mortgage interest you pay on a building you own that you use in your business.
Amber Keefer has more than 25 years of experience working in the fields of human services and health care administration. Writing professionally since 1997, she has written articles covering business and finance, health, fitness, parenting and senior living issues for both print and online publications. Keefer holds a B.A. from Bloomsburg University of Pennsylvania and an M.B.A. in health care management from Baker College.