You didn’t think you would be able to buy a home after striking out on your own and becoming self-employed. Yet you were determined enough to make it happen. While the future can eventually lead you to bigger and better things down the road, you are happy to take your time and build up the business. The only thing you don’t look forward to is paying taxes.
It is a huge chunk of change you have to pay to the IRS for being self-employed. Yet there are a few tax breaks right there in front of you that you may not even be aware about. Did you know that you can deduct your mortgage points from your taxes?
What Is The Mortgage Point Deduction?
When you go to get a loan for your home, the lender will evaluate your income and other factors to determine if you qualify for a mortgage loan and what rates they can offer you. A mortgage point is the charge added to the overall costs when the lender secures the actual loan for your home. On loan papers, mortgage points are usually called “loan origination fees” or “origination fee.” A lender charges these points to make more of a profit, as you will pay these points in the effort to get a lower interest rate.
The IRS looks at mortgage points as types of mortgage interest that you paid in advance, and are fully deductible during the year you paid them. This means that you can actually deduct mortgage points when you pay your taxes. So long as the mortgage points meet the following requirements, you can find yourself getting a great tax break.
- Your loan is used to buy or build a home you will live in most of the time.
- When reporting income, you use the cash accounting method where you receive income and deduct expenses in the same year.
- The points are calculated as a percentage of your mortgage’s principal amount.
- You don’t pay the points in exchange for certain reduced home fees such as lower appraisal fees, title fees, inspection fees or property taxes.
- The funds you have available at closing have to be at least as much as the points the lender charges, and the money you pay at closing cannot be borrowed from any mortgage broker or lender.
How To Deduct Mortgage Points From Taxes?
You will need a 1098 statement that the lender sends to you, as this document will show the number of points you paid as well as the paid mortgage interest. You should receive the form in January from your lender. You will also need IRS forms Schedule A and Form 1040 (not 1040A or 1040EZ as you can’t deduct mortgage points on these forms).
- On Schedule A, look for Line 11 and fill in the total number of points you paid as it is indicated on your 1098 statement.
- If you paid points to a person or business that is not indicated on the 1098 statement, go to Line 12 on your Schedule A and enter the amount along with the name of the person, name of the business, address, Social Security number of the person or Employer Identification Number of the business.
- On your IRS Form 1040, go Line 40a and enter your total itemized deductions that should include your mortgage points.
- Now subtract your deductions from your adjusted income to find out what your taxable income is.
In this day and age, any tax break that you can get is a wonderful thing. So don’t forget to deduct your mortgage points from your taxes.