Home Equity Vs. Mortgage Debt

• The way you use your HELOC proceeds affects how much of your interest you can deduct. No matter what you use your HELOC for, you can at least deduct the interest on the first $100,000 ($50,000 if married filing separately). However, if you use the proceeds for home improvements, the IRS allows you to treat the debt as mortgage debt. This is important because instead of limiting your deduction to the interest on the first $100,000, you can deduct the interest on up to $1 million of mortgage debt ($500,000 for married couples filing separately).
  
  

Interest Paid

• Only the interest payments that you make during the year can be deducted from your income taxes. At the end of the year, your HELOC lender provides you with a Form 1098 to show you how much interest you paid in box 1. If you do not receive the Form 1098 by the end of January, contact your lender to request it.
  
  

Claiming HELOC Interest

• To claim HELOC interest, regardless of whether it counts as mortgage debt or home equity debt, you have to itemize your deductions. This involves filing your taxes with Form 1040 and attaching Schedule A, which lists your itemized deductions. On Schedule A, include the HELOC interest paid on line 10 along with any other mortgage interest you can deduct. This amount, plus any other itemized deductions you claim, reduces your taxable income for the year.
  
  

HELOC Tax Savings

• Since you have to give up your standard deduction, you will not save money on your income taxes if your itemized deductions, including your deductible HELOC interest, does not exceed your standard deduction value. However, if you are already planning to itemize, you can figure your additional tax savings by computing your tax rate times your HELOC interest. For example, if you pay 27 percent in taxes and have a $2,500 HELOC interest deduction, multiply 0.27 by $2,500 to find you save $675 on your taxes.