Form 1098: Mortgage Interest Statement is an Internal Revenue Service (IRS) form used by both homeowners and lenders to report the amount of interest and related expenses paid on a mortgage during the tax year when the amount of interest paid totals $600 or more. The IRS requires that the lender prepare the Form 1098 and deliver the form to the IRS and the borrower to ensure proper reporting of interest payments for real property each year. Real property includes houses, condominiums, mobile homes, cooperatives, and townhomes.
If you paid $600 or more in interest during a calendar year, your lender is required to send you a Form 1098 and the borrower should generally receive their Form 1098 by the end of January. For instance, a Form 1098 for interest payments made in 2022 would be received around the end of January 2023. So, let's take a look at why the Form 1098 can help you as the borrower/homeowner to lower your tax obligation.
Mortgage Interest Deductions: How do they work?
The general interest deduction basics and limitations
When it comes to mortgage interest deductions, the IRS does not limit your ability to deduct based on what your interest rate is or how much your house is worth. However, the IRS does have a ceiling on the total amount of the “qualified mortgage” you can use. A qualified mortgage includes first and second mortgages as well as home equity loans; provided however that home equity loans are only qualified mortgages to the extent proceeds were used to buy, build or improve your home. The IRS permits every homeowner, so long as the homeowner is the primary borrower making payments, to deduct home mortgage interest on the first $750,000 (or $375,000 if married filing separately) of indebtedness if the indebtedness was incurred on or after December 16, 2017, and $1,000,000 (or $500,000 if married filing separately) of indebtedness if the indebtedness was incurred before December 16, 2017.
The limit is a combination of all of your indebtedness, so if you have a mortgage of $400,000 from 2020 on your primary residence and a mortgage of $300,000 from 2021 on your vacation home, you’ll be able to use the full interest deduction available under the rules laid out by the IRS. You will receive separate Form 1098s for each lender and incorporate those Form 1098s in your tax return accordingly.
On the other hand, if you have a mortgage of $500,000 from 2020 on your primary residence and a mortgage of $300,000 from 2021 on your vacation home, you’ll only be able to deduct interest on $750,000 of the $800,000 of indebtedness.
If you refinanced your mortgage during the year, you’ll want to report the Form 1098 mortgage payments for both the mortgage you paid off and the outstanding mortgage to maximize your mortgage interest deduction so make sure you receive the Form 1098 from every lender you paid $600 or more in interest payments to. The same would hold true if you sold a home at any point during the year. Partial year statements are still valuable when it comes to tax deductions!
Other deductions
Discount Points and Prepaid Interest
If you paid discount points to lower your interest rate or prepaid your interest payments for a period of time, the IRS allows you to deduct those items as well. The totals will appear on the Form 1098 you receive, so they will be easy to spot. The IRS has provided guidance here to help taxpayers understand their ability to deduct. Essentially, if you paid upfront points, you could deduct the payment in equal installments over the life of the loan or all at once in the year it was paid depending on whether you meet all the requirements set forth by the IRS. To make sure that you are maximizing your deductions in the most lucrative way, consult with a tax professional who is aware of your individual circumstances.
Mortgage Insurance
Unfortunately, the IRS is no longer permitting mortgage insurance premiums to be an itemized deduction for 2022. It is not clear if mortgage insurance premiums will ever be permissible itemized deductions again.
Summary
For decades, the government has promoted home ownership through a variety of methods and one of those methods is to allow a tax break for Americans who took out mortgages to purchase their home. The most recent IRS rules regarding mortgage interest deductions can be found here and spans roughly 44 pages. While this article provides clear and concise information on the major topics, it cannot take into account every individual’s unique circumstances. If you want to make sure that you are maximizing your interest deductions, please speak with a tax professional. If you don’t have a tax professional but want to find one, the IRS has helpful guidance that can be found here.
Please note that this information should not be construed as tax advice.
