New tax rules are creating confusion
Because of new laws many home related tax rules have changed and now require you to prove how funds are used to qualify for a deduction. This is catching many taxpayers by surprise. So when your mortgage company reports tax-related information to you and the IRS using Form 1098, it no longer means all the interest and points reported on these statements are tax-deductible.
- Mortgage interest deductions have new loan amount limits. For new mortgages starting on or after Dec. 15, 2017, you can deduct interest on up to $750,000 of the loan (down from $1 million for mortgages initiated before Dec. 15, 2017). If your original mortgage is above the threshold, a calculation will be done to determine the deductible amount of interest. You can’t simply deduct the full amount of interest being reported on your Form 1098.
- Proceeds not used to buy a home add complexity. Proceeds from home equity debt that are not used to build, buy or substantially improve a qualified home are no longer tax-deductible. This includes mortgage or home equity proceeds used to pay for college expenses, debit consolidation or other purposes. Mortgage companies issuing these loans will still send you a Form 1098, but it’s up to you to prove how you use the funds during the current year and any prior year.
- Mortgage points requires review of settlement statements. Points are paid as a way to obtain a lower interest rate. Generally, points are deductible in the year they are paid, but they have more restrictions than mortgage interest. Points paid to refinance an existing mortgage, for example, may need to be deducted over the life of the loan. If you bought or refinanced a home in 2018, a review of your mortgage settlement statement may be required to ensure proper tax treatment of the cost of your points.
- Mortgage insurance premiums are not deductible. Congress did not extend the mortgage insurance premium deduction for 2018. If you pay mortgage insurance, don’t wait to file your taxes thinking Congress will change their minds. File your taxes on a timely basis and expect to feel the impact of this eliminated deduction.
With these changes, properly calculating 2018 mortgage deductions is more complicated. For each Form 1098 you receive, make a note on the form to explain what the loan is for to ensure a proper deduction.