Did you replace your old mortgage contract with a new one in 2020? You weren't the only one! As refinancing can accomplish any number of goals, including lowering monthly installments, saving on interest, or even owning the home sooner, it was a popular move, especially in 2020 when interest rates hit historic lows.
If you're gearing up to file your taxes, it's important you understand what you can and cannot deduct from your mortgage refinance, as you want to maximize your return or lower what you owe.
We've got you covered! Here's a breakdown of the things you can and cannot deduct from your taxes!
What Exactly Does "Tax-Deductible" Mean?
Before we get started, let's make sure we're on the same page about tax deductions.
A tax deduction is an expense that a taxpayer or business can subtract from their adjusted gross income.
Why are tax deductions important for taxpayers? Because they can reduce your taxable income. That means less money owed come tax time or even a refund! Taking full advantage of all applicable tax deductions is extremely important for the 2020 tax year, especially considering we're coming out of a devastating pandemic. The goal of many is not just to reduce the amount they owe but get a maximized refund.
What Can You Deduct From Taxes?
So, what mortgage refinancing expenses can you deduct from your taxes for the year 2020?
Generally speaking, the same tax deductions are available whether you're buying your first home or have refinanced your mortgage.
What's the biggest tax deduction when it comes to refinancing your mortgage? Interest. That's right; for most, mortgage interest is tax-deductible, but as with most things, there are rules and limits.
The mortgage interest deduction limit is currently $750,000, down from the one million it was a few years ago. If you're single or are married and filing jointly, you can deduct up to $750,000, or if you're married but filing separately, each can deduct $375,000.
It's important to note that there are restrictions for a mortgage refi deduction. Here's what TurboTax says on the matter:
"You can subtract it from your income, if the following applies:
- The loan is for your primary residence or a second home that you do not rent out
- The loan is secured by your home
- You "itemize" deductions on your tax return"
You can also choose to take a standard deduction if you don't wish to itemize the deductions. How do you know which one to choose? The one that saves you the most money!
Did you pay for "points" when you refinanced your mortgage? Since points are prepaid interest, they may qualify as deductions. However, points are handled a little bit differently than traditional mortgage interest.
Points must be paid directly to the lender in order to qualify, and, in the majority of cases, you're not able to deduct the full amount of the points you paid. Instead, you'd need to deduct them over the term of the mortgage.
That's where many homeowners get thrown off, as refi points are handled differently from points on your original contract. Typically speaking, those points can be deducted in full the year they are paid; not so with a mortgage refinance. If you have questions on how to handle your mortgage refinance points paid, it's best to consult with a tax professional. They can ensure you're making full use of your eligible deductions.
What Can't You Deduct?
There are a few expenses that go along with closing on a new mortgage but aren't tied to the loan itself. Those closing costs are typically not tax-deductible, especially if they're associated with your primary residence.
Closing costs can include a number of fees, such as:
- Home appraisal fees
- Title insurance
- Lender fees
- Attorney fees, if applicable
While closing costs can add up, most homeowners will agree that these costs don't outweigh the positive benefits they get from refinancing.
Should You Refinance This Year?
Even if you refinanced in 2020, there's the chance to secure an even lower interest rate. While mortgage interest rates typically trend upwards, the COVID-19 pandemic and subsequent slowed market have caused rates to plummet to lows unheard of.
Even an interest rate that's just 1% lower than what you currently pay has the potential to save you thousands. The key to understanding when the time is right to refinance is to understand your current contract and the bottom line of a new one. If you aren't able to recoup associated costs and save in the long run, it's not a wise move.
That being said, many homeowners have been able to substantially lower their installments or shorten their contract term to own their home sooner and pay less overall in interest. While whether you ultimately decide to refinance or not depends on several factors, the fact of the matter is, now is the time to explore your refi offers. These low interest rates will not last much longer!
Don't Miss Out on Mortgage Refi Tax Deductions!
Owning a home is expensive. Ensure you're taking full advantage of all the tax breaks and deductions you can. If this is your first time filing taxes with a mortgage or a refinance, you may want to shop around for tax prep specialists.
If you're well-versed in tax filing, be sure you do your homework before getting started! Having itemized deduction lists ready to go will make filing much easier when it comes time to sit down and complete all necessary forms.
There's a lot to keep track of this tax season, what with COVID-19 stimulus checks, unemployment income, and newly implemented unemployment tax breaks, so take your time while filing and do plenty of research so you can get back the money you deserve!