Your Mortgage and Tax Deductions - Here’s what you need to know
Believe it or not, it’s already time to start prepping those tax returns for 2022! This time of year we get many questions regarding what information is needed regarding mortgages to file taxes, as well as what could be a tax deduction.
To get started, you’ll need the usuals: W-2s and 1099s, statements for your retirement accounts and assets, and documentation of your education and childcare expenses, among other items. Homeowners will need a handful of mortgage documents as well. Here’s a quick list of the mortgage documents you may need to file your tax returns:
1098 Form
The 1098 is your mortgage interest statement. It shows how much interest you paid on your mortgage loan for the year. If you choose to write this interest off from your taxable income, you’ll use this form to prove how much you paid.
In some cases, you may have multiple 1098s. This might happen if your loan was transferred to a new servicer during the year, in which case you’d then have one from each servicer. Or you could have multiple 1098s if you have multiple loans, such as a HELOC, or multiple properties — like a vacation home or second house. Your mortgage servicer should send you these by the end of January.
Closing statement
If you bought a home in the previous year, your closing statement is important. When you take out a mortgage, you may have the option to buy mortgage points, which is a form of prepaid interest. Each point, which costs 1% of your mortgage amount, can get you about 0.25% off your mortgage rate. Mortgage points are paid at closing and must be paid directly to the lender to qualify you for the deduction. If you chose to do so, you may be able to deduct the points you paid at your closing.
Property tax statement
Your property taxes may also deductible. The amount you paid is usually noted on your 1098 form, but there’s a chance it might not be — particularly if you chose not to use an escrow account.
Home improvement receipts
In general, home improvements aren’t deductible, but there are some instances when they might be. For example, if your updates were medically related, such as adding a wheelchair ramp, they could be a medical write-off. If they improve your home’s energy efficiency, like a solar panels, they might also qualify you for a write-off or tax credit.
So what else is deductible?
Interest On The Mortgage For Your Main Home
It doesn’t matter if your home is a traditional house, co-op, apartment, condo, mobile home, or houseboat - many types of property qualify for mortgage interest deductions! One note, the property will not qualify if it doesn’t have basic living accommodations, such as proper sleeping, cooking and bathroom facilities. The property must also be listed as collateral for the loan you’re deducting interest payments from. In some instances, you can also use this deduction if you got a mortgage to buy out an ex spouse’s half of the property in a divorce scenario.
For military members - You can still deduct mortgage interest if you receive a non-taxable housing allowance from the military.
Interest On The Mortgage For A Second Home
Many people are suprised to find out they can receive a tax deduction on a mortgage for a home that is not a primary residence, as long as the second home is listed as collateral for that mortgage. There are some special scenarios and caveats, so be sure you review with a tax professional. If you have more than one second home, you can only deduct the interest for one.
Interest On A Home Equity Loan
A home equity loan, or home equity line of credit, is money borrowed from the equity you have in the home. For the interest you pay on a home equity loan to qualify, the money from the loan has to be used to buy, build or “substantially improve” your home. If the money is used for something else, such as buying a car or paying down credit card debt, the interest isn’t deductible.
