As of December 19, 2017, MyQL is now referred to as Rocket Mortgage.
Tax season is in full swing. For 2016, there are some important changes on your 1098 Mortgage Interest Statement.
Before we get into what’s changing, let’s talk about what your 1098 is and why it has the potential to help you keep more money in your pocket rather than handing it over to Uncle Sam.
What’s Home Mortgage Interest Deduction?
If you have a mortgage, one of the big perks of homeownership is the ability to deduct your mortgage interest when you file your taxes. This means that for primary and second homes, you can deduct the total amount you pay in mortgage interest every year.
For the purposes of your taxes, prepaid interest points to buy down the rate when you closed the loan, as well as mortgage insurance premiums (MIP) and private mortgage insurance (PMI) payments qualify.
Although, there are some restrictions on when you can apply this deduction.
What Can Be Deducted and When?
There are three situations in which you can fully deduct your home mortgage interest.
- Grandfathered Debt: This is debt that you took out on a home on or before October 13, 1987. There are no limits on the mortgage amounts for this interest deduction. This may apply if you’ve refinanced after that date as long as you didn’t refinance for more than the principal owed on the existing mortgage.
- Home Acquisition Debt: If you took out a mortgage after October 13, 1987 to buy, build or improve your home, you can deduct mortgage interest on primary and second home mortgages if the total mortgage debt plus any grandfathered debt is less than $1 million, or $500,000 if married and filing separately.
- Home Equity Debt: If you took out equity for any reason other than to build or improve your home (consolidate debt, add to a college fund, etc.), you can deduct interest on mortgage amounts totaling $100,000, or $50,000 if you’re married and filing separately.
There are also some special rules regarding when you can apply your deduction for prepaid interest points. You may be able to deduct more of your points in the year you bought them, but generally speaking, you can’t deduct the full cost of prepaid points in the year you paid them but, rather, a portion each year over the life of the loan.
For example, if you bought a house with a 30-year mortgage term and paid $3,400 in points up front, factor in 12 months of mortgage payments each year. Divide the cost of the points paid by the full term of the loan (in months). Take this number and multiply it by the number of mortgage payments made in the tax year.
If we apply this formula to the above example, it comes out as follows:
($3,400/360) * 12 = $113.33 deduction each year
If your adjusted gross income is more than $100,000 ($50,000 if married and filing separately), your ability to deduct mortgage interest may be limited or eliminated altogether.
As with any tax preparation issues, we recommend speaking with a financial advisor or tax professional.
So What’s Changing?
The IRS has made some changes to 1098 forms that begin for the 2016 tax year. This is to help make sure that the people who are claiming the deduction should be getting it.
Those of you who’ve looked at your form this year should have seen three new boxes:
- One for the unpaid principal balance as of Jan. 1, 2017
- One for the date the mortgage was originated (closed)
- One with the property address
This additional information shouldn’t change your ability to qualify. If you’ve qualified before, you’ll likely qualify now. The new boxes just gives the IRS some additional data points for verification.
If you’re a Quicken Loans client, you may have received your 1098 in the mail. You’re also able to view your 1098 online in MyQL under documents.
Do you have questions? Let us know in the comments.
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