I bought a house last summer, and was looking forward to a huge tax break this year. But as I review my taxes, it looks like the 2006 interest (only six months worth) from the mortgage will fall short of the standard deduction for Married Filing Jointly.
Does that mean the mortgage interest doesn’t help this year? I keep getting the feeling I’m doing something wrong and not coming up with the refund I should be getting.
When we redid our mortgage a few years ago to a lower rate (and shorter term) the drop in interest made taking the standard deduction a better deal. The increase in the standard deduction in recent years has made this more common.
Note that you don’t have to take the standard deduction. It certain rare cases it can be a better overall deal. E.g., in my state you have to take the standardized deduction on the state if you did it on the federal, etc. If I had an unusual state deduction that didn’t qualify on the federal, I might gain enough back on state taxes to counter the increase on federal taxes.
IANACPA, but what about once you add in your other deductions like state income tax (or sales tax), property taxes, etc. Also, if you paid an origination fee as a percentage of loan value, I believe that generally can be deducted as well (again not a CPA) either in whole the first year or in a prorated fashion over the life of the loan. I was in the same boat last year and it kind of sucked but this year is much better.
The mortgage interest won’t help if your total amount of itemized deductions does not exceed the standard deduction amount. Take a good look at schedule A, though, and see if you can deduct any of those things (if your state does not have income tax, be reminded that state sales tax is deductible again this year even though schedule A does not say so). If your schedule A total exceeds the standard deduction, then it is probably to your benefit to itemize.
Any points you may have paid can be added to the standard deduction as well, and don’t forget the property taxes.
IANACPA but I have bought houses three times and this is correct. If you paid points up front at settlement you can deduct the entire cost of the points. However, if you financed the points then you may not deduct them in the year of the settlement; I am not familiar with the rules allowing you to amortize them over the life of the loan–see a tax advisor.
Also make sure you deduct any taxes paid at settlement (but not money that goes into escrow to pay taxes later).
What does “paying points” mean? Is it your down-payment?
Your lender may offer you the opportunity to “pay points”, which is sort of an upfront payment on your interest. You will pay a percentage of your loan amount for a reduction in your interest rate (1 point - ie, 1% of your loan amount - might get you a .50% or .25% reduction in your rate). If you paid points, it will be reflected in your closing documents and on the final Good Faith Estimate from your lender.
Incidentally, some lenders will allow you to pay “negative points”, where you get cash back in exchange for a higher interest rate.
Points are generally only paid when you first take out the loan. They are interest you pay at the beginning of the loan. Lenders tend to offer a wide variety of loans. you can get a 30 year loan at 6% interest with 2 points. For a $100,000 loan this would mean you get $100,000 for your house and you loan is for $102,000 for 30 years at 6% interest. The extra $2,000 is generally deductible as interest the year you take out the loan. The lender may also offer a loan at 7% interest with no points. When I refinanced a few years ago you had to keep the loan for about 7 or 8 years until the lower interest rate paid for itself.