Home mortgage rates have soared during the economic recovery from the pandemic, but the swelling ranks of homeowners facing steep interest payments this year may find some relief based on how they file their tax returns.

Thanks to the mortgage interest deduction, filers who choose to itemize their tax returns rather than take the standard deduction can deduct the entirety of their home interest payments in addition to taking other write-offs.

Some tax experts say that’s likely to be a more attractive option to more tax filers this season.

Atiya Brown, a certified public accountant and owner of The Savvy Accountant, said mortgage holders with with higher interest rate payments are more likely to get the most favorable returns by itemizing them, rather than taking the standard deduction, a comparison that she shows her clients.

“I definitely think that a lot more people are going to see the difference,” Brown said.

She added that she expects more filers will seek professional help this season. Choosing to itemize mortgage interest means having to itemize other sections of the tax returns as well, Brown said, which can add enough complexity to require an accountant.

The upside of a high interest payment

The standard deduction is a specific dollar amount set each year by the IRS that filers can use to reduce their tax burden. It’s designed to save filers the time and resources often necessary to itemize deductions.

For the 2023 tax year, the standard deduction is $13,850 for single filers and $27,700 for married taxpayers filing jointly. But many homeowners could find the mortgage interest deduction a better option.

A single filer paying a 4% rate on a $500,000 home loan — equating to monthly interest payments of about $1,667, or $20,000 a year — could thus end up seeing substantial savings.

And many households are paying higher rates.

While mortgage rates have been falling since reaching a post-pandemic high of 7.8% last fall, the 30-year mortgage rate is currently still hovering above 6%.

Until the Tax Cuts and Jobs Act, passed by Republicans in 2017, the mortgage interest deduction could be applied to the first $1 million of the loan for a single flier and $500,000 for married couples filing separately.

Today, it only applies to the first $750,000 of a typical mortgage loan for single filers, or $375,000 for married couples filing separately. The change was meant to allow more people to take the standard deduction, which the TCJA also increased.

But the relevant portion of the law expires in 2025 and would cause the limit to go back up to $1 million — and there is no sign yet that Congress will keep the current limit, according to the Bipartisan Policy Center.

Kenneth Chavis IV, a senior wealth adviser at Versant Capital Management, said that while many new homeowners may not be used to itemizing their deductions, they are now more likely than ever to reap tax benefits from doing so, assuming many are among those living with higher mortgage interest payments.

“Interest rates have skyrocketed — but more people will be eligible for (more) mortgage interest deduction,” especially newer homebuyers, Chavis said.

What are the limitations?

Principal payments and down payments cannot be deducted on your taxes. Nor can closing costs, appraisal fees or insurance.

Mortgages on rental properties also cannot be deducted if they are not the filer’s primary residence.

And only the portion of a home used for living can be counted toward the deduction. In other words, you cannot double-dip if you plan to take any home office tax write-offs.

However, both late payment and pre-payment penalties are in many cases deductible.