Which Mortgage Costs are Tax Deductible?

You can deduct certain mortgage expenses. The Internal Revenue Service (IRS) promotes home ownership through a number of tax deductions related to the cost of mortgages. Your lender documents mortgage expenses on your tax form 1098. All mortgage expense deductions are itemized deductions. You can only claim itemized deduction so if you forgo the standard deduction and file your taxes using form 1040 and Schedule A

1) Mortgage Interest – Mortgage interest is typically the largest deduction for people with mortgages. The IRS permits you to deduct the interest on the first $500,000 of your mortgage. If you are married and file a joint return, the limit increases to the interest on the first $1 million. To qualify, the loan must be backed by your home and your must make the payments on the mortgage.

2) Discount Points- When you take out a mortgage, some lenders offer you the option of paying additional costs at the closing of the loan, known as points, to reduce the interest rate on the loan. These points are deductible whether you are refinancing or taking out a new mortgage on a new home. If you are taking out a new mortgage, you can deduct the points in the year that you pay them. If you are refinancing, you need to deduct the points over the life of the loan.

3) Private Mortgage Insurance- if you took out your mortgage in 2007 or later, you are allowed to deduct private mortgage insurance payments. Private mortgage insurance payments are typically required on conventional mortgages if you cannot put down more than 20 percent of the value of the home as a down payment. You can only claim this deduction if your adjusted gross income is below $100,000 ( $50,000 if you are married but file separate returns). Your deduction will be reduced if your adjusted gross income falls between $100,000 and $110,000.

4) Additional Miscellaneous Mortgage Deductions- Mortgage Late Payments – can be deducted as mortgage interest if the associated charge is not related to the performance of an actual service by the lender or loan servicer. Mortgage Prepayment Penalty – considered deductible interest as long as the penalty is not related to the performance of an actual service performed by the lender or loan servicer.

5) Circumstances Relating to the Distressed Economy

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