How to Record the Overpayment of an Interest Refund on a 1040

Filling out your income tax forms can be a daunting task, especially if you run your own business and need to make deductions to limit your tax liability. Complicating the matter is the fact that self-employed individuals usually pay in on their taxes over the course of an entire year and have to estimate the amount they will owe. When it comes to real estate investors who lend money and take interest payments on their notes, they must be able to account for any overpayment of interest and subsequent refund.

Instructions

1. Determine the amount of interest you were overpaid. Overpayment of interest can be handled in one of two ways by the lender. The lender can either refund the interest overpaid in the year in which it was paid or he can simply credit the overpayment to the borrower for the following year. The overpayment of interest is recorded on Internal Revenue Service Form 1098, the "Mortgage Interest Statement" form that is used to supplement the standard IRS Form 1040. You must receive over $600 in interest payments to include this information.

2. Complete Form 1098. This form requires that you include your full name and address in the "recipient" box while placing the full contact information for the borrower in the payer/borrower's box. In Box 1, record the amount of interest paid by the borrower. Report the amount of points paid on a principal residence purchase. Box 3 is where you will record how much interest that you refunded as the result of an overpayment.

3. Complete Form 1040 with all of your related income tax information. If you received more than $600 in interest payments, which may include a refund of payment that was credited to the borrower and then carried over into the present tax year, you will need to include this information on Line 21 of Form 1040, which calls for any other income not specifically designated in the previous lines. Next to the amount, fill in the description as an overpayment of interest refund. Be sure to attach Form 1098 as documentation of this refund.

4. Finish filling out the remainder of Form 1040. Sign and date your return. Send the forms to the appropriate Internal Revenue Service office.

References

• Internal Revenue Service: Instructions for Form 1098 -- Main Contents
• Internal Revenue Service: Information About Your Notice, Penalty and Interest
• Internal Revenue Service: Form 1040
• Internal Revenue Service: Form 1098
• Internal Revenue Service: Instructions for Form 1098