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How to Find Out If Your Mortgage Offers Tax Breaks

08/05/2010
No one likes to pay taxes. Few of us appreciate spending money on interest, either. But if you're a homeowner in the U.S., both are often unavoidable. However, if you're a mortgage holder, your mortgage may present you with several tax advantages, including the ability to lower the taxable income amount. Deducting interest paid on a first and second mortgage and points paid on a new mortgage can do just that.
What you should know about mortgage interest deductions.

What follows is an overview of the standard deductions. If you're:

• Single, the standard deduction is $5,700
• Head of household, the standard deduction is $8,350
• Married filing separately, the standard deduction is $5,700
• Married filing jointly, the standard deduction is $11,400

Mortgage interest can only be deducted if you itemize using a Schedule A and choose to forfeit the standard deduction to which you're entitled. Before choosing, tally the total amount of all itemized deductions. If the itemized amount exceeds the standard deduction amount, it makes sense to itemize.
Examples of expenses you can itemize using a Schedule A include mortgage interest, charitable contributions, PMI and property taxes. Remember, the more you itemize, the more you reduce the amount of income that's subject to taxation.

What you should know about mortgage point deductions.

The IRS requirements outlined below determine when a taxpayer can deduct points paid on a new mortgage.

• The primary residence secures and is the subject of the mortgage.
• You didn't have to borrow money to cover the mortgage point payment.
• Your settlement statement clearly indicates the points you paid.
• The amount paid was in line with what's considered average for the type of mortgage and the area.
• Payment of points is a generally accepted practice in the area.
• Point computation was based on a percentage of the mortgage principal amount.
• You did not pay points for other fees that typically appear on the settlement document.
• Your accounting is cash-based rather than accrual.

If all requirements are met, the full amount paid towards points can be deducted. But this can only be done the same year points were paid. Besides the tax deduction advantage, paying points lowers the rate of interest so you pay less interest over the loan tem. Additionally if you compare mortgage rates before locking into a mortgage, you will pay less over time.

Yes, a mortgage is a huge debt. If you have one, you may as well reap the maximum tax advantage possible. If necessary, consult an income tax or IRS specialist to learn more about tax planning, assets and losses, and itemizing deductions.

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