Article originally published on Forbes.com by Kelly Phillips Erb
I’ll be dissecting some of the most basic tax forms for you. The more you know, the less scary some of these forms can be.
Here’s what you should know about the form 1098, Mortgage Interest Statement:
A form 1098, Mortgage Interest Statement, is used to report mortgage interest, including points, of $600 or more paid to a lender for a mortgage.
For federal income tax purposes, a mortgage is a loan secured by your main home or second home. It includes first and second mortgages, home equity loans, and refinanced mortgages. A home can be a house, condominium, cooperative, mobile home, boat, or similar property. It must provide basic living accommodations including sleeping space, toilet, and cooking facilities. That means that your traditional rancher qualifies – as does a yurt, a mobile home and even a yacht.
There is, however, a catch: while you may claim your qualified home mortgage interest on your federal income tax return so long as you meet the criteria, you might not have a form 1098 to show for it. The IRS only requires a lender to issue a form 1098 if the property that secures your mortgage is considered real property. Real property is defined, for this purpose, as “land and generally anything built on it, growing on it, or attached to the land.” If a mortgage is not secured by real property, the lender is not required to file form.
The rules for a mortgage apply to your primary home, as well as a second home. The total amount of debt that you can use for purposes of calculating the home mortgage interest deduction for your main home and second home cannot be more than $1 million ($500,000 if married filing separately) even if you pay more than that; some exceptions apply for grandfathered debt. You can bump the number if you have qualifying home equity debt.
The $600 threshold applies separately to each mortgage but like a form 1099, it’s not impossible that your lender will issue a form 1098 to you even if you paid less than $600. This also means that you may receive more than one form 1098 if you have more than one mortgage.
The form 1098 looks like this:
The form 1098 looks like this:
The number that most taxpayers care about is found at box 1 (circled in red). Box 1 reports the total amount of home mortgage interest paid to your lender. Assuming that you meet the criteria (discussed generally above), you can deduct this entire amount on a Schedule A. Yep, Schedule A. That means you have to itemize your deductions to take advantage of the home mortgage interest deduction (only about 1/3 of taxpayers itemize).
Some homeowners may also be able to deduct points. Points are included on form 1098 at box 2. Points are typically pre-paid interest that you pay in advance to improve the rate on your mortgage. You can deduct points in the year that you pay them if you meet certain criteria: the points must be paid on a loan secured by your main home in order to purchase or build your main home. Points must also be within the range of what’s expected in the area where you live in order to claim the deduction. And remember, just because they’re reported on form 1098 doesn't mean that you qualify for the deduction.
Your lender will also report any refund or credit for a prior year’s overpayment of interest. If this applies to you, you’ll see it at box 3. This is unusual.
Box 4 is a catch all. This can be used by the lender to report information to the homeowner (this information does not have to be reported to the IRS). This includes general information but also information that might be useful when preparing your taxes – especially the amount of real estate taxes paid. In addition to your home mortgage interest, real estate taxes paid on your primary – and your secondary home – are generally deductible. If you escrow money for real estate taxes as part of your mortgage, your lender may report the amount of real estate taxes paid here (if you pay real estate taxes out of pocket, separately from your mortgage, you won’t see that here). Remember that the amount of your escrow may not equal the amount of your real estate taxes paid: you only get a deduction for the latter.
If real estate taxes don’t make it onto box 4, they may be reported at box 5. Although box 5 is typically considered “reserved,” it makes no difference where taxes are reported to you so long as the correct amount ends up on your Schedule A.
And that’s it: form 1098 is generally a pretty simple form. If you have questions about items on the form, ask your lender – or check with your tax preparer.
Article originally published on Forbes.com by Kelly Phillips Erb
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