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The Greatest Middle-Class Tax Break

June 5th, 2014 No comments

What is the single best tax break middle-class taxpayers get?

Education?  Well, education is pretty good when you can claim it, but the numbers of households that can do that are limited.

Medical? No, not unless a household has suffered catastrophic medical costs in a given year.

Child Care? Not even close.

The single best break for middle class taxpayers is home ownership.

Home ownership means having a mortgage and paying property taxes. Quite a burden, financially, but the government helps you carry it. You’re busy building equity as you pay for your home, while the government lets you deduct your mortgage interest and property taxes from your income, reducing your tax liability.

Claiming those deductions means using a schedule A. Schedule A offers the opportunity to itemize and deduct more than just mortgage interest and property taxes. Other types of taxes, charitable giving, medical expenses, employee business expenses and several miscellaneous expenses can all be deducted as well. As long as the itemized amounts exceed the standard deduction, the taxpayer gets the advantage of paying less tax.

Form 1098 is the Mortgage Interest Statement. This is the report the bank sends every year detailing the amounts that can be claimed for mortgage interest, points or origination fees and property taxes. The interest from home equity loans or home equity lines of credit is also reported on a form 1098 and is deductible, as well.

Sometimes this information is included on the last monthly account statement of the year. Most of the time a form 1098 is sent to the property owners separately, no later than the end of January each year.

The 1098 names the lending institution and gives its ein. Box 1 details the amount of interest that has been paid throughout the year. If late payments were made during the year, and late fees paid, those amounts should be included in the mortgage interest amount.

If this mortgage is new, for a home purchase or because the mortgage has been refinanced during the year, points might be included in Box 2 of the form. Points are a pre-payment made at the time the loan is instituted, in order to lower the rate of the loan. Each point represents one percent of the total amount borrowed, and is either paid in cash at the closing or rolled into the refinanced amount.

Points that are paid in advance of a loan are fully deductible in the year they are paid. Points paid as part of a refinance are prorated across the number of months the new loan is for (360 months, 180 months, 120 months, etc.)

Any amount that appears in Box 3 represents a refund of overpaid interest from a prior year. If the mortgage interest was a deduction on schedule A in that year, the Box 3 amount must be included as miscellaneous income on line 21 of form 1040.

Box 4 generally shows property tax payments made through the mortgage escrow.

Box 5 is used for information purposes.

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Categories: 1099 Forms Tags: ,

What is IRS Form 1098?

June 11th, 2013 No comments

IRS Form 1098 is also known as the Mortgage Interest Statement.  The form is used to report mortgage interest of $600 or more (including certain points) that was earned in the calendar year.  The lender is the payer while the borrower is the payee.

The form contains 3 pages of information and is usually held together by a perforated edge.  The first page is Copy A.  Copy A is a red-ink form.  If you are paper filing, you can print your data on top of Copy A and mail the Form 1098 along with the 1096 to the IRS. Copy B is sent to the borrower.  Copy B can be printed on plain paper with black ink.  Copy C is retained by the lender and can also be printed on plain paper with black ink.

The top part of the form asks for the lender name, address, phone number and TIN.  Then the borrower name, address and TIN followed by the account number.

There are 4 boxes on the IRS 1098 form.  Each box is discussed below:

Box 1:  Shows the mortgage interest paid from the borrower to the lender during the calendar year. This amount does not include points, subsidies or any deductibles.

Box 2: Shows the points paid on purchase of principal residence.  What are mortgage points?   A mortgage point is a charge that the borrower pays in order to obtain a mortage on a home.  One mortgage point is a fee that is 1% of the total amount of the loan.  Lets say the borrower wants to borrow $250,000 to purchase a house.  One point on a $250,000 loan is $2,500.  Mortgage points are tax deductible as a home mortgage interest if the deductions are itemized on Form 1040, Schedule A.

Box 3: Shows any refund of overpaid interest that the borrower made in a prior year or years. The borrower can not deduct this amount.

Box 4 is blank and can show any additional information that the lender in this case wants to show on the form.  You can show the property address, real estate taxes or insurance paid from escrow or anything else.

The borrower may deduct only the amount she or she paid and points paid by the seller that represent his or her share of the amount allowable as a deduction.

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