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The Greatest Middle-Class Tax Break

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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Erich J. Ruth

Erich J. Ruth provides technical support for National Software which is the parent company for 1099FIRE. 1099FIRE develops and markets a comprehensive range of products that enables any size of business or institution to effectively manage and comply with year-end filing requirements. 1099FIRE is an employee-owned company located in Phoenix, Arizona.

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