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How to Use Form 1098 to Claim Tax Deductions on Your Mortgage Refinance

Couple doing paperwork | Form 1098 Tax Deductions

Believe it or not, tax season is already here. And if you are looking for possible deductions on your federal income taxes, there are plenty of reasons to read on. If you completed a mortgage refinance in 2020, you may be realizing the benefits of lower payments and possibly a lower rate. But if you’ve recently bought your first home, did you know that you may be able to claim tax deductions because of the mortgage itself?

That’s because in many cases, the interest you pay on your mortgage is tax deductible. But that might not be the only way you can save on your taxes if you own your home.

There are several deductions you can claim on your tax return based on your mortgage. But where do you find the information you’ll need to claim those deductions? Read on.

Can mortgage payments be tax deductible?

The short answer is yes and no.

If you have a mortgage, then you’re likely paying some form of interest on it. That’s the result of the interest rate you agreed to when you bought your home or refinanced your existing mortgage.

Whenever you pay your mortgage, whether you pay monthly or in some other increment, you are likely paying some amount to the principal of your loan (the amount remaining from what you originally borrowed) and some amount towards the interest, which is the fee the lender charges to lend you the money.

You cannot claim a deduction for the amount you pay towards your principal. The interest, on the other hand, is a different story.

Can you deduct mortgage interest?

Yes. According to IRS rules, if your mortgage was originated after December 15, 2017, you can deduct the interest you paid on your mortgage during the tax year of the first $750,000 of your loan. If your loan is from prior to December 15, 2017, you can deduct the interest you paid  up to the first $1 million of your mortgage.

One critically important piece of the mortgage interest tax deduction is that to be able to take the deduction, you must be itemizing your deductions rather than taking the standard deduction.

According to the IRS, for tax year 2020, the standard deduction for married couples filing jointly is $24,800. The deduction is $12,400 for single taxpayers and married individuals who are filing separately. For heads of households, the standard deduction is $18,650.

It’s a good idea to talk to a tax professional about whether it makes sense for you to take the standard deduction or itemize your deductions, which will require you to provide more information to the IRS.

If you do decide to itemize, then the mortgage interest deduction may be the largest deduction you have.

Are there other mortgage interest deductions you can take?

Indeed, there are.

When it comes to a cash-out refinance, you may be able to deduct the interest paid on your total loan balance if you use this loan for a capital home improvement. These improvements must be permanent additions that increase your home’s value such as a roof, another room, air conditioning, etc. The IRS does not consider household repairs, small design changes and aesthetic changes as deductible.

However, if medically required, home improvements can be deducted if they DON’T add value to the home. For example, if the improvements cost $50,000, and improved the home's value by $20,000, the homeowner could deduct only $30,000. Income and age factors also apply.

But where do you find out how much money you paid in interest so you can use it on your tax return? That’s where Form 1098 comes into play.

What is a 1098 form used for?

A Form 1098 is a record of how much you paid on your mortgage in that tax year. It is a very important document that provides information about your mortgage that you can use when you file your tax return.

If you have a mortgage, you will likely soon receive (or perhaps you already received) a Form 1098, otherwise known as a “Mortgage Interest Statement.” This is a form that your mortgage company is required to provide to both you and the IRS if you paid more than $600 in mortgage interest in a given year.

Who must file Form 1098?

Mortgage companies and servicers are required to provide a Form 1098 to any borrower who paid more than $600 in mortgage interest in a given year. You don’t have to use the form or provide it to the IRS if you are taking the standard deduction. However, if you are itemizing your deductions (listing deductible expenses and adding them up) then you’ll need to provide the form to the IRS.

Lenders and mortgage servicers typically send out these forms in the first few months of year, in plenty of time for you to file your taxes on time by April 15.

If you have not received your Form 1098 by mid-March, you should probably contact your mortgage servicer (the company who you make your mortgage payments to) to ask for your form. You may also be able to access the form online through your mortgage account portal if your servicer has one.

What’s on a Form 1098?

Form 1098 has a lot of information that may seem overwhelming at first blush, but a closer look at the form shows important information for your mortgage payments in that year.

The form will have your mortgage company’s information, your information (including your name, address, and Social Security number), and information about your mortgage. Click here to see an example on the IRS website. The version of the form you should receive is “Copy B For Payer/Borrower.”

The numbered sections on the right of the form are the ones that matter for your tax purposes.

  • Box 1 shows the amount of interest you paid on your mortgage in that year
  • Box 2 shows the remaining balance on the principal of your mortgage
  • Box 3 is the date your mortgage was originated
  • Box 4 will have a dollar figure if you overpaid any interest on your mortgage and were refunded
  • Box 5 shows the amount your paid in mortgage insurance in that year (if you have mortgage insurance on your loan)
  • Box 6 shows any points you paid when your loan was originated (which we’ll explain in more detail below)
  • Boxes 7 through 11 contain more information about your property and mortgage

When your loan was originated through a purchase  or refinance, your lender may have offered you the chance to pay “points” on your loan.

If you did, these points may be tax deductible. Discount points are fees paid to lower your interest rate. One discount point costs 1% of your total loan amount. So, if you were to refinance with a loan of $50,000 and you paid two points, it would cost you $1,000 (or $500 for each point).

Points are generally deducted over the life of the loan. As points are considered interest (pre-paid interest), homeowners may be able to claim their points as part of the $750,000 mortgage interest deduction for the year the points were paid.

If you didn’t pay points, then the main number on the Form 1098 you need to focus on is the “mortgage interest received from payer(s)/borrower(s).” That is the amount of interest you paid on your mortgage in that tax year.

That figure is what will go onto your tax return form if you choose to itemize your deductions.

How does a 1098 affect my taxes?

That really depends on how much interest you paid on your mortgage and if you are taking the standard deduction or itemizing. But as we’ve detailed, if you paid more than $600 in mortgage interest, you will receive a 1098 tax form.

It is a good idea to discuss your tax return options with a tax professional to determine whether it makes more sense for you to take the standard deduction or to itemize.

If you are itemizing, you’ll need to provide a copy of your Form 1098 to your tax professional so they can assist with completing your tax return documents. Also, make sure to keep a copy of your Form 1098 for your records even after your taxes have been filed.

Are there other potential deductions that don’t appear on the 1098 form?

Yes, there are. You may be able to deduct the closing costs on a rental property. While settlement fees are usually not deductible on your primary residence, the rules are just the opposite for a rental property. The IRS views this income as taxable and must be reported to the IRS. However, certain associated expenses from a rental property can be claimed as itemized deductions. So, you may be able to deduct the interest and points paid on a mortgage on rental property, as well as the closing costs and fees.

Additionally, you may be able claim a deduction if you have a home office. However, given the number of people who worked from home in 2020, we caution that many people are not eligible to claim the home office deduction. Due to federal tax law changes that went into effect in 2018, you cannot claim the home office deduction if you are an employee of a company. The home office deduction is only applicable to “qualifying self-employed taxpayers, independent contractors and those working in the gig economy,” according to the IRS.

The IRS has very specific rules surrounding what qualifies as a home office. For example, you must regularly and exclusively use part of your home for conducting business. That's not to say you must exclusively work from home, but that the area of your home you work from is used exclusively for business.

We suggest you consult with a tax professional for financial or tax advice on any deductions you may be eligible for.

New American Funding can help

Form 1098 is a valuable one and can be a key component of your tax return. If you have questions about your Form 1098, contact your mortgage company or servicer. Interested in seeing what your payment could be after refinancing your mortgage? Visit our refinance calculator to find out. And if you have questions about buying a home or refinancing your existing mortgage, contact a New American Funding Loan Officer today. They’re ready to help.

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