One of the biggest benefits of owning a home and having a mortgage loan is having an extra tax deduction. The tax rules in the United States allow homeowners to deduct all mortgage interest paid on federal taxes. This means you can reduce the amount of taxes you have to pay to the government.
Requirements
To deduct mortgage interest on your federal taxes, you must meet certain requirements that have been defined by the Internal Revenue Service (IRS).
You must file Form 1040 and itemize your deductions. You can’t claim mortgage interest taxes if you use any other form.
It must be your mortgage loan. You can’t take the mortgage interest deduction if you’re making payments on a loan that belongs to someone else. (Be careful paying someone else’s mortgage – you may owe gift taxes.)
The mortgage interest must have been paid on a qualified home. Qualified homes include your primary home and a single second home that is not rented out. If you have a second home that’s been rented out, you can deduct the mortgage interest if you used the home more than 14 days.
Deducting Closing Costs
Prepaid interest can also be deducted, but only in the tax year that the interest applies to. For example, if, in 2010, you prepay interest for 2011, you can only deduct that interest when you file 2011’s tax return in 2012. (Remember, income taxes are filed in the next year).
Points charged by the lender generally considered prepaid interest and generally must be deducted over the life of the mortgage rather than being deducted in the year that they’re paid. This applies even when you refinance a mortgage loan.
If you are a home seller who paid points for the home buyer, these points are considered a selling expense and aren’t deductible as mortgage interest. However, the homebuyer can deduct seller-paid points over the life of the mortgage loan.
Other closing costs paid to the lender aren’t considered interest and can’t be deducted. This includes your application fee, appraisal fees, notary fees, and document preparation fees.
Deducting Mortgage Insurance
If your mortgage insurance contract began after 2006, you can deduct your mortgage insurance premiums as mortgage interest. This includes mortgage insurance from the Department of Veterans Affairs, Federal Housing Administration, Rural Housing Service, and even private mortgage insurance.
The amount of mortgage insurance you can deduct is gradually reduced as your adjusted gross income exceeds $100,000 or $50,000 if you are married filing separately. If your adjusted gross income is more than $109,000, or $54,500 for married filing separately, mortgage insurance premiums can’t be deducted.
Form 1098
Your mortgage lender should send a Form 1098 or statement of mortgage interest paid if you paid more than $600 in mortgage insurance. Lenders are required to send this form by January 31 of the following year. For example, you should receive a statement of mortgage interest paid in 2010 by January 31 , 2011. The form will only include the amount of mortgage interest, points, and mortgage insurance that can be deducted.
Mortgage interest can be deducted on Schedule A. It may not be beneficial to deduct mortgage interest if your total itemized deductions do not exceed your standard deduction.
