As tax season approaches, homeowners must understand how their mortgages can impact their tax filings. Identifying deductible expenses and gathering the necessary documentation can lead to significant tax savings. This guide will help you navigate mortgage-related tax implications and ensure you’re well-prepared.
Key Mortgage-Related Tax Deductions
Mortgage Interest Deduction
What Is It? If you itemize deductions on your tax return, you can deduct the interest paid on your mortgage for your primary residence and, in some cases, a second home.
Limitations: For mortgages taken out after December 15, 2017, you can deduct interest on the first $750,000 mortgage debt ($375,000 if married filing separately). The limit for mortgages taken out before this date is $1 million ($500,000 if married filing separately).
Points Paid on Mortgage
What Are Points? Points, or loan origination fees or discount points, are upfront payments made to reduce your mortgage interest rate.
Deduction Eligibility: Points paid can be deductible in the year they’re paid if they meet specific IRS requirements, such as being associated with the purchase or improvement of your primary residence. If they don’t meet these criteria, you may need to deduct them over the life of the loan.
Property Taxes
Deduction Details: State and local property taxes are deductible; however, there’s a cap. The total deduction for state and local taxes, including property taxes, is limited to $10,000 ($5,000 if married filing separately).
Non-Deductible Closing Costs
While several mortgage-related expenses are deductible, many closing costs are not. These include:
- Homeowners insurance premiums
- Appraisal fees
- Title insurance
- Home inspection fees
- Attorney fees
However, some of these costs can be added to your home’s basis, which may reduce capital gains tax when you sell the property.
Essential Documentation for Tax Filing
To accurately claim deductions, ensure you have the following documents:
- Form 1098: Mortgage Interest Statement
What It Is: This form is provided by your mortgage lender and details the amount of mortgage interest and points paid during the tax year.
When to Expect It: Lenders typically send Form 1098 by January or early February. If you haven’t received it by mid-February, contact your lender.
- Closing Disclosure
Purpose: This document provides a detailed account of your loan terms and closing costs. It’s essential for identifying deductible expenses like points paid.
- Property Tax Statements
What to Look For: Records of property taxes paid during the year, which may come from your local tax authority or be included in your mortgage escrow statements.
- Receipts for Home Improvements
Why They’re Important: While not immediately deductible, costs associated with home improvements can be added to your home’s basis, potentially reducing capital gains tax upon sale.
Steps to Prepare for Tax Season
- Organize Your Documents: Gather all relevant paperwork, including the above forms and statements.
- Consult IRS Publications: For detailed information, refer to IRS Publication 936 (Home Mortgage Interest Deduction) and Publication 530 (Tax Information for Homeowners).
- Consider Professional Assistance: If you’re uncertain about any deductions or documentation, consulting with a tax professional can ensure accuracy and maximize your tax benefits.
Conclusion
Understanding the tax implications of your mortgage and maintaining thorough records can lead to substantial savings. By staying informed and organized, you’ll be well-prepared to navigate tax season confidently.
Disclaimer: This article is for informational purposes only and should not be considered tax advice. Consult with a tax professional for advice tailored to your specific situation.
