What Are the Benefits of Filing Mortgage Information on Tax Returns?

Mortgage Interest Deductible

Every month when you make your mortgage payment, a portion goes towards paying off your principal loan balance and the rest covers the interest charges you bank imposes. Luckily, the IRS allows you to deduct this mortgage interest if you satisfy the qualified home requirements. This requires that your mortgage lender have a security interest in your home. A security interest gives the lender an ownership interest so that it can foreclose or repossess the home if you ever stop making those mortgage payments. In addition, the IRS only considers your main home plus one additional home you own that is not a rental property as a qualified home. When the tax year is over, your lender will send you a Form 1098 to report all interest payments you made during the year. You must report the amounts from this form on your tax return.

If your mortgage lender requires you to pay points to obtain the home loan, the IRS treats this as deductible mortgage interest as well. The points you pay are prepaid interest, and you must spread the deduction of your points over the life of the mortgage loan. However, you can deduct them in full in the first year you own the home if the amount of funds you provided at or before closing, including the points that the seller pays, is at least equal to the amount of point charges. Additionally, the points your lender charges must be calculated as a percentage of the home's purchase price. Lastly, the closing statement for your mortgage must indicate your payment of these points.

The IRS allows a separate deduction for the mortgage insurance premiums your lender requires you to pay, provided you enter into the insurance contract after 2006. If you prepay these premiums, you must allocate your deduction over the shorter of 84 months or the entire repayment period of the mortgage.

Most state or local governments impose a property tax based on the value of homes located within its jurisdiction. If you pay a property tax on your home, and the agency charging it uses a uniform rate that applies to all homeowners, then it qualifies as a property tax for which the IRS allows you to deduct with your other itemized expenses on Schedule A. If you receive information on your annual property tax payments from your local government, you should use this information to report your annual property tax deduction on your federal return.