How to Deduct Discount Points From Taxes
Mortgage discount points are an expense you pay when you are closing on your mortgage that represent a prepayment of interest on your loan. Each point usually costs about 1 percent of the total amount of the loan, and each point lowers your mortgage payment. Another advantage of paying points upfront on your mortgage is that the IRS allows you to take an itemized deduction for these expenses on your income taxes.
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Instructions
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Determine the total amount of the mortgage points that you can deduct. If the points you paid include any expenses that are usually including the settlement sheet, such as appraisal, inspection, or attorney fees, you must subtract those costs from the points you paid.
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Determine the amount of the points that are deductible for the current year. The amount you can deduct depends on the kind of mortgage you have. If you took out a first mortgage, all of the points are deductible at the time of the loan. If you are refinancing, you must deduct the points over the life of the loan. For example, if you refinanced for a new 15 year mortgage and you paid $1,500 in points, you would be able to deduct $150 each year of the mortgage.
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Determine whether you are better off itemizing your deductions or taking the standard deduction. Total your itemized deductions, including your mortgage points, and compare the result to the amount of standard deduction you can take. If the itemized deductions are worth less than the standard deduction, you are better off not using the mortgage discount points deduction.
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File your taxes using Form 1040 and attach Schedule A if you are itemizing your deductions. Mortgage points are listed on line 12 of Schedule A.
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Tips & Warnings
Your mortgage company will send you your tax information on Form 1098. This form should include information about the points you paid as well as the amount of mortgage interest you paid for the year. If you are taking a deduction for mortgage points, you can likely also take a deduction for mortgage interest. In some cases, not all points and interest is reported on Form 1098.
