Mortgage interest deduction
One of the neatest deductions itemizing home owners can take advantage of is the mortgage interest deduction, which you claim on Schedule A. To get the mortgage interest deduction, your mortgage must be secured by your home — and your home can even be a house trailer or boat, as long as you can sleep in it, cook in it, and it has a toilet.
Interest you pay on a mortgage of up to $1 million — or $500,000 if you’re married filing separately — is deductible when you use the loan to buy, build, or improve your home.
If you take on another mortgage (including a second mortgage, home equity loan, or home equity line of credit) to improve your home or to buy or build a second home, that counts towards the $1 million limit.
If you use loans secured by your home for other things — like sending your kid to college — you can still deduct the interest on loans up $100,000 ($50,000 for married filing separately) because your home secures the loan.
PMI and FHA mortgage insurance premiums
Helpfully, the government extended the mortgage insurance premium deduction through 2013. You can deduct the cost of private mortgage insurance as mortgage interest onSchedule A — meaning you must itemize your return. The change only applies to loans taken out in 2007 or later.
What’s PMI? If you have a mortgage but didn’t put down a fairly good-sized down payment (usually 20%), the lender requires the mortgage be insured. The premium on that insurance can be deducted, so long as your income is less than $100,000 (or $50,000 for married filing separately).
If your adjusted gross income is more than $100,000, your deduction is reduced by 10% for each $1,000 ($500 in the case of a married individual filing a separate return) that your adjusted gross income exceeds $100,000 ($50,000 in the case of a married individual filing a separate return). So, if you make $110,000 or more, you lose 100% of this deduction (10% x 10 = 100%).
Besides private mortgage insurance, there's government insurance from FHA, VA, and the Rural Housing Service. Some of those premiums are paid at closing and deducting them is complicated. A tax adviser or tax software program can help you calculate this deduction. Also, the rules vary between the agencies.
Prepaid interest deduction
Prepaid interest (or points) you paid when you took out your mortgage is 100% deductible in the year you paid them along with other mortgage interest.
If you refinance your mortgage and use that money for home improvements, any points you pay are also deductible in the same year.
But if you refinance to get a better rate and term or to use the money for something other than home improvements, such as college tuition, you’ll need to deduct the points over the term of the loan. Say you refi for a 10-year term and pay $3,000 in points. You can deduct $300 per year for 10 years.
So what happens if you refi again down the road?
Example: Three years after your first refi, you refinance again. Using the $3,000 in points scenario above, you’ll have deducted $900 ($300 x 3 years) so far. That leaves $2,400, which you can deduct in full the year you complete your second refi. If you paid points for the new loan, the process starts again; you can deduct the points over the term of the loan.
Home mortgage interest and points are reported on IRS Form 1098. You enter the combined amount on line 10 of Schedule A. If your 1098 form doesn’t indicate the points you paid, you should be able to confirm the amount by consulting your HUD-1 settement sheet. Then you record that amount on line 12 of Schedule A.
If you refinance your mortgage and use that money for home improvements, any points you pay are also deductible in the same year.
But if you refinance to get a better rate and term or to use the money for something other than home improvements, such as college tuition, you’ll need to deduct the points over the term of the loan. Say you refi for a 10-year term and pay $3,000 in points. You can deduct $300 per year for 10 years.
So what happens if you refi again down the road?
Example: Three years after your first refi, you refinance again. Using the $3,000 in points scenario above, you’ll have deducted $900 ($300 x 3 years) so far. That leaves $2,400, which you can deduct in full the year you complete your second refi. If you paid points for the new loan, the process starts again; you can deduct the points over the term of the loan.
Home mortgage interest and points are reported on IRS Form 1098. You enter the combined amount on line 10 of Schedule A. If your 1098 form doesn’t indicate the points you paid, you should be able to confirm the amount by consulting your HUD-1 settement sheet. Then you record that amount on line 12 of Schedule A.
These tax tip excerpts brought to you by HouseLogic.com. You should not treat any opinion expressed here as a specific inducement to follow a particular tax strategy, but only as an expression of opinion. SR Real Estate Group does not guarantee and is not responsible for the accuracy or completeness of information, and provides said information without warranties of any kind. All information presented herein is intended and should be used for educational purposes only. Nothing herein should be construed as expert tax advice. You should always conduct your own research and due diligence and obtain professional advice before making any decision. SR Real Estate Group and Keller Williams Realty, Inc., will not be liable for any loss or damage caused by your reliance on information contained in this blog.
Rahul and Smitha Ramchandani are a licensed real estate Broker-Salesperson/Sales Representative Team with Keller Williams in New Jersey. They are Buyer Specialists and a Home Marketing Experts. You can reach Smitha and Rahul and their team online at: http://www.Morris-Homes.com, http://www.SRRealEstateGroup.com, andhttp://www.TheTownhouseExpert.com.
Their team specialize in North Central New Jersey including towns such as Boonton, Chatham, Chester, Convent Station,Denville, East Hanover,Florham Park, Hanover, Harding Twp., Mendham, Montville, Morristown, Morris Plains,Morris Twp., Mountain Lakes, Parsippany, Randolph,Rockaway, Whippany
