Maximizing Your Tax Savings: How to Deduct HELOC Interest

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Is HELOC Interest Tax Deductible?

A home equity line of credit (HELOC) can be a great way to fund home renovations or consolidate debt at a lower interest rate. But did you know that you might be able to deduct the interest you pay on a HELOC from your federal income taxes? Here’s what you need to know about the rules for deducting HELOC interest and how to do it.

Rules for Deducting HELOC Interest

The IRS allows you to deduct the interest on home equity loans and HELOCs if the funds are used to “buy, build, or substantially improve your home.” This means that if you use your HELOC to remodel your kitchen or build an addition, the interest may be deductible. However, if you use the funds to consolidate debt or cover personal expenses, the interest is not deductible. To take advantage of this deduction, you must itemize your taxes instead of taking the standard deduction.

IRS Rules and Limits for HELOC Interest Tax Deduction

The IRS has specific rules and limits for deducting HELOC interest, which can vary based on when you took out your HELOC, your tax filing status, and how you use the funds. Here’s a breakdown:

• Before December 15, 2017: You could deduct interest on HELOCs for any purpose, with a loan debt limit of $1 million for joint filers and $500,000 for separate and single filers.
• After December 15, 2017: The deduction is only available if the funds are used to buy, build, or substantially improve your primary or secondary home, with a loan debt limit of $750,000 for joint filers and $375,000 for separate filers.

Keep in mind that the 2017 tax reform raised the standard deduction significantly, so it may not make sense to itemize your taxes even if you have deductible HELOC interest. For 2024, the standard deduction is $14,600 for single filers and $29,200 for married couples filing jointly.

What You’ll Need to Claim the HELOC Interest Tax Deduction

To claim HELOC interest on your income taxes, gather the following documents:

• Mortgage interest statement (Form 1098): Your HELOC lender should provide this form, showing the interest paid during the year.
• Schedule A (Form 1040): Use this form to itemize your mortgage interest deduction.
• Proof of eligible expenses: Collect receipts and invoices that prove you used HELOC funds to buy, build, or improve the home securing the HELOC.

Tax laws change frequently, so consult with a tax professional to ensure you have the most up-to-date information and necessary documents.

How to Deduct HELOC Interest on Taxes

If you qualify to deduct HELOC interest, follow these steps:

1. Make Sure Itemizing Is Worth It: Add up all your eligible deductions for the year and compare them to the standard deduction. If your itemized deductions are higher, proceed with itemizing.
2. Gather Your Supporting Documents: Collect necessary documents like Form 1098, Form 1040, receipts, and bank statements.
3. Itemize Your Total Deductions: Enter your total deductions, including HELOC interest, on line 8a of Schedule A (Form 1040).

More Tax Breaks for Homeowners

In addition to deducting mortgage interest, homeowners may also be eligible for other tax breaks:

• Property taxes: Deduct up to $10,000 for state and local income taxes, including property taxes.
• Discount points: Deduct points purchased to reduce your mortgage interest rate.
• Mortgage tax credit: Claim a mortgage credit certificate if you qualify, with a credit amount capped at $2,000.

The Bottom Line

HELOCs offer many benefits, including lower interest rates and potential tax deductions if used for substantial home improvements. If you itemize your deductions, this benefit could help you save money on your income taxes. For any mortgage service needs, call O1ne Mortgage at 213-732-3074. We are here to help you navigate your mortgage options and find the best solutions for your financial needs.

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