Mortgage Interest: What Can You Deduct at Tax Time?

Second in a series of articles

"Income tax returns are the most imaginative fiction being written today."

-- Herman Wouk

Deducting the interest you pay on your home mortgage is one of the big tax benefits available to American homeowners.

If you have a mortgage, by the end of this month your lender will send you a Form 1098, which tells you how much interest you paid in 2008. When you do your taxes, that number goes on Line 10 of Schedule A of Form 1040.

If you have a loan from a private person, such as a relative, you will need to determine yourself how much interest you have paid. That number goes on Line 11.

There are three major limitations on the amount of interest you can deduct.

First, you can deduct the interest only on the first $1 million in mortgage loans on your first and second homes combined -- what's known as a qualified home. Interest on debt over that limit is not deductible.

The second limitation involves "acquisition indebtedness." According to the Internal Revenue Service, "Home acquisition debt is a mortgage you took out after Oct. 13, 1987, to buy, build or substantially improve a qualified home (your main or second home)."