For most people, the biggest home-related deduction is for mortgage interest. How do you figure out how much you've paid in mortgage interest during the year?
You should receive a statement from your lender by the end of January listing the mortgage interest you paid during the previous year. This statement will be labeled Form 1098. It may be attached to, or part of, your monthly mortgage statement, so be sure that you study your your January statement carefully to identify any portion that may be labeled as Form 1098. The amount shown as interest paid on Form 1098 is the amount you deduct on your tax return.
Where do I take this deduction?
Fill out Schedule A, Itemized Deductions, to take a deduction for mortgage interest.
- If you received Form 1098 reporting the amount of mortgage interest you paid for the year, record your interest deduction on Line 10.
- If you didn't receive Form 1098, use Line 11 instead.
If your home loan is with a private party (for example, with the person from whom you bought the home), you may not receive a statement of interest paid even though your mortgage holder should complete one for you. You can still deduct the interest as long as your loan is secured by your home.
Report your lender's name, address and Social Security number on the lines next to Line 11. (You should have been given this information during the closing of your home purchase). Remember that you have to be liable for repayment of the loan to deduct mortgage interest. If you pay your son's or daughter's mortgage to help them out, for example, you cannot deduct the interest unless you co-signed the loan.
What about late charges?
You can deduct a late payment charge as home mortgage interest as long as the charge was not for a specific service you received in connection with your mortgage loan.
What about a prepayment penalty?
If you pay off your home mortgage early and you're required to pay a prepayment penalty, you may deduct that penalty as home mortgage interest as long as the charge was not for a specific service you received in connection with your mortgage loan.
For more information on mortgage interest, see IRS Publication 936: Home Mortgage Interest Deduction.