Tweet This
By now, you probably have a stack of tax forms from employers, banks, stockbrokers, lenders and more on your desk - or more likely, the kitchen counter. For some of you, those tax forms will end up in the hands of your tax professional (for more on hiring a tax professional, click here); the rest of you will input the information on those forms,
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, a yacht or a vacation home.
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.
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 Internal Revenue Service (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 1098.
Additionally, you might not receive a form 1098 if the is mortgage was taken out by a corporation, partnership, trust, estate, association, or company (other than a sole proprietor) - even if you are a co-borrower or the payer of record.
If a lender is supposed to issue a form 1098 to you, it will look like this:
There are three copies of the form 1098. You'll receive this Copy B (black form) while the Copy A (red form) is provided directly to the IRS. You may also receive Copy C (identical to Copy B) for your records.
Your identifying information is reported on the left side of form 1098. Your Social Security Number may also be on the form – or just the last few digits. The first digits of the number may be redacted for your privacy (this is a relatively new development for certain forms like this one – your entire Social Security Number is still required for certain other forms like your W-2); no matter what your copy indicates, the lender will report your entire Social Security Number on the Copy A provided to IRS.
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. If you prepaid mortgage interest in 2015, you may also see the prepaid interest in box 1. Pay attention to timing: our Tax Code isn't built for advanced payments and in some instances, you might not be able to take a deduction for paying ahead (check with your lender and your tax professional if you aren't sure or the numbers don't add up). Assuming that all of the interest you paid on your mortgage is deductible, you would claim the deduction on a Schedule A, which means you must itemize your deductions in order to deduct the interest.
Some homeowners may also be able to deduct points on their Schedule A. Points are funds typically paid to obtain a mortgage or to improve the rate on your mortgage. Points that are required to be reported to you are included on form 1098 at box 2; not all points are reportable. Unlike interest, you generally cannot deduct the full amount of points in the year paid (you have to deduct them over the life of your mortgage). However, you can deduct points in the year paid if you meet all of the following criteria:
- The points must be paid on a loan secured by your main home in order to purchase or build your main home;
- Paying points is common where the loan was made;
- The points paid are a percentage of your loan amount and are within the range of what’s generally charged in the area where you live;
- You use the cash, not accrual, method of accounting (the cash method is what most individual taxpayers use);
- The points are not replacements for other items such as appraisal fees, inspection fees, title fees, attorney fees, and property taxes;
- The amount of money you paid at or before closing (such as a down payment or earnest money), plus any points the seller paid, total at least as much as the points charged; and
- Points shown on the settlement statement (like a Form HUD-1) are clearly noted.
If all of this sounds confusing, it is. As with home interest, if you plan to deduct points and aren't sure whether you qualify, double-check with your tax professional.
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 an amount in box 3. If you have an amount reported in this box, it is not deductible and in fact, may be reportable as taxable income on line 21.
Box 4 is a catch-all. This is generally information that is reported to you but is not required to be reported to IRS. For example, 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.
For years, box 5 was considered "reserved" but these days, the box is shaded in on Copy A and typically left blank on Copy B and Copy C. The old box 5 will disappear altogether in tax year 2016.
Actually, it's not just box 5 that will change.
As for this year, if you haven’t received your form 1098 for the 2015 tax year by February 1, 2016, contact your lender.
For more details on other tax forms, check out the rest of the series:
