Enjoy this post written by fellow Active Rainer Jamie Russen. This comes at a perfect time as we start gathering our tax information to file our 2010 taxes.
You can deduct certain mortgage expenses. The Internal Revenue Service promotes home ownership through a number of tax deductions related to the cost of mortgages. Your lender documents mortgage expenses on your tax form 1098. All mortgage expense deductions are itemized deductions. You can only claim itemized deductionso if you forgo the standard deduction and file your taxes using form 1040 and Schedule A
1) Mortgage Interest - Mortgage interest is typically the largest deduction for people with mortgages. The IRS permits you to deduct the interest on the first $500,000 of your mortgage. If you are married and file a joint return, the limit increases to the interest on the first $1 million. To qualify, the loan must be backed by your home and your myust make the payments on the mortgage.
2) Discount Points- When you take out a mortgage, some lenders offer you the option of paying additional costs at the closing of the loan, known as points, to reduce the interest rate on the loan. These points are deductible whether you are refinancing or taking out a new mortgage on a new home. If you are taking out a new mortgage, you can deduct the points in the year that you pay them. If you are refinancing, you need to deduct the points over the life of the loan.
3) Private Mortgage Insurance- if you took out your mortgage in 2007 or later, you are allowed to deduct private mortgage insurance payments. Private mortgage insurance payments are typically required on conventional mortgages if you cannot put down more then 20 percent of the value of the home as a down payment. You can only claim this deduction if your adjusted gross income is bleow $100,000 ( $50,000 if you are married but file separate returns). Your deduction will be reduced if your adjusted gross income falls between $100,000 and $110,000.
4) Additional Miscellaneous Mortgage Deductions- Mortgage Late Payments - can be deducted as mortgage interest if the associated charge is not related to the performance of an actual service by the lender or loan servicer.
Mortgage Prepayment Penalty - considered deductible interest as long as the penalty is not related to the performance of an actual service performed by the lender or loan servicer.
Mortgage Insurance Premiums - for mortgage insurance contracts issued in connection with a home purchase after 2006, qualified mortgage insurance may be treated as mortgage interest and therefore is generally considered deductible.
Reverse Mortgages - funds a homeowner receives from a reverse mortgage are considered loan advances, not income, therefore the amount received is not taxable. Interest accrued on a reverse mortgage is not deductible until the loan is actually repaid by the qualified senior or the property is sold.
5) Circumstances Relating to the Distressed Economy-
Cancelled (or Forgiven) Mortgage Debt - The Mortgage Forgiveness Debt Relief Act of 2007 states that taxpayers need not claim as income the amount of debt discharged by their lender in association with a foreclosure or restructuring of their mortgage on their primary residence. This exclusion applies only to forgiven or cancelled debt which was used for the purpose of purchasing, building or improving a primary residence. Mortgage debt forgiven after refinancing may also qualify for the exclusion if the previous mortgage balance which was refinanced was used to purchase, build or improve a primary residence. This relief applies only to debt secured by a taxpayer's primary residence (no investment properties or second homes allowed) and should result from a decline in the value of the home or a deterioration of the taxpayer's financial condition. This exception applies to mortgage debt forgiven between the years 2007 through 2012 and up to $2 million in debt may qualify. The amount of debt forgiven is then deducted from the cost basis of a taxpayer's home. The lender is normally required to issue a form 1099-C indicating the amount of the cancelled debt. See IRS publication 982 for more information.
The First-Time Home Buyer Tax Credit - a part of The Housing and Economic Recovery Act of 2008 and applies to qualified "first time buyers" for a home purchased as a primary residence between April 8, 2008 and April 30, 2010. Note that under the program a first time buyer is defined as someone who has not owned a primary residence in the prior 3 year period. Second homes and investment properties do not qualify for the credit. The credit is claimed on IRS Form 5405. For a purchase completed in 2009, the credit can be claimed on either the 2008 or 2009 tax return. For a purchase completed in 2010, the credit can be claimed on either the 2009 or 2010 tax return. The program was expanded and amended in 2009 eliminating the requirement initiated in 2008 which required repayment of the credit over a 15 year period. Repayment of credits issued in 2009 and 2010 is only required if the applicable residence does not remain the taxpayer's primary residence for a minimum period of 36 months. The allowable credit is up to 10% of the purchase price of a home with a maximum credit of $7,500 in 2008 and $8,000 for homes purchased in 2009-2010. The program was expanded in late 2009 to include existing homeowners who purchase a new replacement residence after Nov. 6, 2009 through April 30, 2010 and are permitted a credit up to $6,500. For purchases on or prior to Nov. 6 2009, for married joint filers the income limit under the program is $150,000 to $170,000 and for single filers the limit is $75,000 to $95,000. On purchases occurring after Nov. 6, 2009 for married joint filers, the income limit is $225,000 to $$245,000 and for single filers $125,000 to $145,000.