If you own your own home and prepare your own taxes, you're probably aware of the existence of the Mortgage Interest Tax Deduction. As one of the most popular tax deductions, the Mortgage Interest Tax Deduction has provided millions of cash-strapped homeowners with a path towards financial solvency. Many mortgage lenders rely on the continued existence of this credit to entice potential home-buyers to purchase their first homes.
In fact, real estate agents and loan officers alike often tempt prospective buyers with the promise of a bigger annual tax refund. Unfortunately, it appears likely that the Mortgage Interest Tax Deduction may shrink or be completely phased out during the coming years as a result of a long-term federal budget deal. Should this occur, it might render home ownership considerably more expensive for middle-class buyers.
Until this occurs, you should familiarize yourself with the basics of the deduction. For starters, you must report the total value of your particular deduction on Schedule 1040-A. If you're like most taxpayers, this is the primary form that you'll use to keep track of your tax liability.
Before you can properly report the value of your deduction, you'll need to look over the Form 1098 that you'll receive from your mortgage lender by February 15 of each year. This form will contain the total amount of the interest that you paid on your mortgage during the preceding tax year. Since the Mortgage Interest Tax Deduction is designed to offset only the cost of these interest payments, you may claim no more than this amount on Schedule 1040-A. You can't claim any of the principal, amortization or fees that may have added to the "true" cost of your mortgage.
Many borrowers are surprised to find that the amount quoted on their Form 1098 is significantly lower than the amount of interest that they paid over the course of the year. This is typically due to the means by which mortgage lenders calculate the accrual of interest on certain adjustable-rate mortgages.
If the rate on your mortgage dropped without your knowledge, you may have continued to make payments according to the higher rate schedule. When your mortgage lender accepted these payments, it may have used the "extra" funds that you unwittingly included in them to offset the principal balance on your loan. Such a move might ultimately reduce the amount of time that it takes for you to pay off your mortgage while limiting the size of your interest deduction.