Home loans are often very costly. In addition to the upfront fees that most lenders charge for the cost of doing business (origination fees, discount points and third-party vendor fees), borrowers must also pay an enormous amount in mortgage interest over the course of a home loan. However, there are advantages to these costs. Homeowners are entitled to certain tax breaks, including the home mortgage interest deduction. The best way to claim mortgage interest relief is to file for this deduction. In most cases, it will significantly reduce your total tax liability--spelling a larger tax return.
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Things you need
- Form 1098 (mortgage interest)
- Form 1040
Contact your mortgage loan lender after Jan. 1 of each year. You need to obtain your 1098 form from the lender, not the government. This statement shows the total you paid in mortgage interest, insurance and points over the course of the previous year. These statements must be mailed by Jan. 31 each year.
Fill out your Form 1040 (or Form 1040EZ) as you normally would do. This form details your earnings from the previous year. Make sure to collect all year-end tax statements before filling out this form--W-2s and 1009s, namely.
Obtain a blank Schedule A. This is the form used to deduct taxes and interest paid in the previous year. You can use this form to deduct insurance costs, property taxes and some local income taxes. This is also the form used to deduct mortgage interest and points.
Add up the amounts found on Lines 1 and 2 on the Form 1098. This is the total you paid the previous year in mortgage interest and points (origination fees). Enter this figure on Line 10 of your Schedule A. Complete the rest of this form, if applicable.
Review the Schedule A with your tax adviser. Make sure the numbers are accurate and based solely upon the 1098 form sent to you by your lender, not your own calculations. Calculate how much this limits your tax liability with your accountant.
File your Form 1040 and Schedule A together. Retain a copy of these forms for your own records. The IRS recommends a seven-year retention period on past years' tax returns.
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