 Income tax 2022-2023, itemized deductions, home mortgage interest, get ready and some coffee so we could stave off the government attack with income tax preparation. Well, maybe we can't stave them off, but we could at least, we could slow them down a little bit, I think. Most of this information can be found in the instructions for Schedule A Taxure 2023, which you could find on the IRS website at iris.gov, iris.gov. Looking at the income tax formula, we're focused on what I would call the below the line deductions. More specifically, the itemized deductions, remembering the first half of the income tax formula is basically a funny income statement. Most income statements having income minus expenses resulting in net income, here having income minus various deductions resulting in taxable income. Remembering deductions for taxes are good, therefore we're typically looking for more of them. One of the major differences between the types of deductions include the fact that the adjustments to income or above the line deductions do not typically need to clear a hurdle such as the standard deduction before they are beneficial to the taxpayer, whereas the itemized deductions do typically need to clear the hurdle of the standard deduction before they become beneficial. First page of the form 1040, we're looking at line 12, the greater of the standard deduction or itemized deduction. If the itemized deductions are greater, then we would be populating them on the Schedule A. The Schedule A are the itemized deductions. The list of the deductions are on the left, although this is not the whole schedule. These are the standard deductions, the hurdles that we would have to clear in order to be itemizing, which are tied greatly to the filing status such as single married filing joint or head of household. Single filing status has a standard deduction 13, 8, 50, married filing joint, doubling that to 27,700, head of household in between 20,800. If they are older than a certain age or blind, then we have single filers could have one or two of those items, which would increase the standard deduction as we can see on the right. Married filing joint would have four separate items that could apply because there's two people involved, the standard deductions on the right, and so on. So we're going to be continuing on with the interest, looking here more specifically at the mortgage interest, remembering the general idea of an income tax would typically be, to be fair, we would tax the net income, meaning we would be allowing deductions for those types of things that were necessary in order to generate the income, which we can see clearly on, say, a Schedule C for a business income, which is an income statement where we have income minus expenses, which are basically business deductions and are applying the tax rate to the net income, not to the gross income. With W2 income, then the idea is that the employer is providing the expenses, and therefore we're not writing off the expenses. The Schedule A has a bunch of items on it that deviate from that general idea for various different reasons that you can argue, whether they be valid or not. But the idea now is that we have some of these personal items that you would think personal in nature and therefore wouldn't be natural deductions for an income tax, but are included nonetheless in the code, things like charitable deductions where they're trying to nudge us to give to charity, because they don't think we would if otherwise or something like that, it seems kind of insulting to me. I don't know. But then we have, of course, the mortgage interest. Now, the interest, you would think that if we took out a loan for purchase of equipment that we used in a business, the rent on the equipment would be a normal business expense. But we also get the personal purchase of the home and the mortgage interest on the home, possibly to be deductible, the argument being that owning a home is like the American dream was the argument and so on. I would think a large part of that was also lobbyists within the housing industry that wanted to subsidize the housing industry, which they did quite well with that, which probably increased the housing prices and made it a little bit more complicated in the long run to decide whether or not you can afford a home. But that's first a word from our sponsor. Yeah, actually, we're sponsoring ourselves on this one because apparently the merchandisers, they don't want to be seen with us. But that's okay, whatever, because our merchandise is better than their stupid stuff anyways. Like this CPA thinking cap, for example. CPA thinking, CAP, you see what we did with the letters. And this CPA thinking cap is not just for CPAs either. Anyone can and should have at least one possibly multiple CPA thinking caps. Why? Because based on our scientific survey of five people, all of whom directly profit from the sale of these CPA thinking caps, wearing this CPA thinking cap without a doubt, according to the survey, increases accounting productivity tenfold. Yeah, at least. Apparently the hat actually channels like accounting energy from the quantum field ether directly into your head, allowing you to navigate spreadsheets faster. It's kind of like how in like the matrix when Neo learns kung fu, or at least that's what the scientific survey is saying. So get one because the scientific survey participants could really use some extra cash. If you would like a commercial free experience, consider subscribing to our website at accountinginstruction.com or accountinginstruction.thinkific.com. That's kind of where we are at this point in time. So when we look at the deduction of interest, the mortgage interest is going to be the big one. That's going to be the one if someone owns a home that might push people over from taking the standard deduction to the itemized deduction, especially when you combine the mortgage interest with the property taxes that are state and local taxes, which also might be itemized deductions. So let's get into the weeds of the mortgage interest tip. So if you are a homeowner who received assistance under a state housing finance agency hardest hit fund program or a emergency homeowners loan program, you can see publication 530 for the amount you can deduct from the online 8A and 8B. So oftentimes when you get into the purchase of the home, you can get into government incentivized areas where they're trying to help people to afford a home and so on and so forth. And then you get into these questions as to whether or not if you've got some kind of benefit, then should you also get the tax deduction, right? You get these overlaps that end up happening and things can get quite complex relatively quickly. So a home mortgage is any loan that is secured by your main home or second home regardless of how the loan is labeled. So when we think about a home loan for most people, the home is going to be their largest investment typically. So that means most people have one home in order to be purchasing the home. They're going to have to take out a loan or mortgage and then in order to finance the loan or mortgage, they're going to be paying interest. The interest is the thing that is going to be deductible. Notice here, we also have a second home. So you would think that would be more beneficial for more wealthy individuals who could have two homes. And then of course, if we have the loans on the two homes, that could be a significant amount as well. So it includes first and second mortgages. So when we take out a loan, oftentimes when we purchase the home, we're going to take out a loan on it to be paying for the purchase price of the loan. We could take out a second, which could happen for various types of reasons. But in essence, we have two loans. Typically when you think of it from the banking side of things, the bank wants to lend you money and they want to assure that you pay the money back. They're going to be obviously earning interest. The way that they assure that is they use the loan as collateral so that if you default on the loan, they can go after the home and they don't want to do that typically because they just want to be collecting their interest, but they have the threat of being able to do that is the general idea. What if you have two loans outstanding? Well, then you might have one bank that has the primary recourse of the value of the home if it was to be taken and sold, and then the second one has the secondary recourse. So you would think that you would have less favorable rates, for example, on the second than the primary because they might not have as favorable, the bank might not have as favorable terms in terms of the collateral. So first and second home equity loans and refinanced mortgages. So what's a refinanced situation? If you have a home and you've got a loan on it, then at a future point in time, the interest rates on the market are going to change. So if the interest rates become lower on the market than what you purchase on the home, you might want to then refinance the home so that you can basically take out a new loan and basically restructure the loan. You can kind of think of it that way, hopefully getting a more favorable rate, which of course costs something to do to process that through, but then possibly you can lock down more favorable rates that hopefully you can have for a longer period of time. And then so you end up in the same kind of situation where you have your home, you've got a loan with it, and you have the collateral of the home to back up the loan and you have interest on it that might be deductible. A home can be a house, condominium, cooperative, mobile home, boat or similar property. So when you think about what qualifies as a home, it's pretty wide. There's a pretty wide range of items that qualify as a home. So it must provide basic living accommodations, including sleeping space, toilet and cooking facilities. So those are probably the ones you're going to be looking at if you're living in just basically, you know, something, a boat or something like that and it doesn't have like a bathroom in it, then that's one of the things that you know you would think might disqualify it as a home. So check the box on line eight if you had one or more home mortgages in 2023 with an outstanding balance and you don't use all of your home mortgage proceeds from those loans to buy, build or substantially improve your home. So now we get into the issue of what did you use the proceeds of the loan for and this gets somewhat complex. Normally when you buy a home, you're going to take out a loan just to be purchasing the home and so then you would think that that type of loan would be deductible because that's what the government is trying to basically incentivize people to be able to afford a home as long as it's not, if it's in within a reasonable range you would think they might put a cap on that. However, from the bank's standpoint, you can imagine they don't really care what you spend the money on as long as they have the recourse of the home as collateral. That's how it would generally be if there weren't like regulations involved and so on. But if you take out a loan and then you use it not to improve the home or purchase the home but rather to buy a car or to go on vacation then you would think that's not the goal of the IRS. That's not what they're trying to basically be incentivizing and that of course could lead to complications. So interest paid on a home mortgage proceeds used for other purposes isn't deductible on line 8A or 8B. So see limits on home mortgage interest later for more information about what interest you can include on lines 8A and 8B. Now note that this could cause kind of issues when people are doing personal finance and they're trying to consolidate their loans. In other words, the home loan is one of the loans, the best loan to basically have as collateral sometimes because it would be at least if you can deduct the interest. So some people when they have a lot of credit card debt or if you have a lot of a car loan and other types of loans then one strategy from a financial statement perspective or just a personal finance perspective would say let's see if we can consolidate some of those loans get rid of those high interest rates on the credit card and the car payments and so on and possibly see if we can use the home as collateral so that that collateral might allow us to get lower interest rates because the lender is more secured in that case. But when you use that strategy it's going to complicate things because you might not be using again the proceeds of the loan for the purchase or improvement of the home. So then you have questions about the deductibility so that could come up from a tax standpoint when you're doing the tax return and from a personal finance standpoint when you're trying to think about how to free up cash to do whatever you need to do or possibly in consolidating debts to try to take advantage of lower interest rates for example, TIP. You used any home mortgage proceeds for a business or investment purpose interest you paid that is allocable to those proceeds may still be deductible as business or investment expense elsewhere on your return. So if we took out the loan so you could imagine a situation where you're saying I need money to start my Schedule C business that I'm going to report on the Schedule C I need to take out a business loan. What's the bank going to say? The bank is going to say I need collateral in order for me to do that. If you have business assets like equipment that might work as collateral which would make sense because those are assets of the business and you're using the loan for the business but as long as the bank has recourse they don't really care you would think in theory if it was a personal asset in other words if you say I need a business loan I'm going to put my home up as collateral on the business loan then the bank as long as the bank is confident that you're going to repay the loan and if not have the backup of being able to take the collateral the home you would think that they still would want to basically give the loan but although the home is collateral you didn't use the money for the purchase of the home or improvement of it so you would think it might not be deductible on the schedule A however you are using the proceeds for business purposes and therefore even though it's a personal collateral you would think you might be able to take the interest as you would a normal kind of situation from an income tax system as a business expense because you needed the loan to purchase like equipment in order to generate revenue in the future which is something that you would think would be naturally deductible from an income tax perspective but not on the schedule A possibly on like a schedule C or other business area limits on home mortgage interest so what are the limits? your deduction for home mortgage interest is subject to a number of limits so if one or more of the following limits applies you can see publication 936 to figure your deduction so once we get into these limits once they go into play the question is do these limits apply number one and then number two if they do then we got to get into the calculations to see how we are going to calculate the deductible part so limit for loan proceeds not used to buy, build, or substantially improve your home that's what you would think the IRS is trying to incentivize at least in theory because they are subsidizing the home builder market right so they want the loan proceeds to be used to buy, build or improve the home so you can only deduct home mortgage interest to the extent that the loan proceeds from your home mortgage are used to buy, build or substantially improve the home the home securing the loan so you took out the loan using the home as collateral and then you have to use those proceeds to do to buy, build, or improve the home for deductibility because that's why the IRS is having you deduct them in theory the bank doesn't care or wouldn't care right in theory they just care that you can go to Hawaii and go on a vacation and whatever as long as the bank feels secure that you can pay back the loan and they have the recourse if you don't of the the home so that's where it gets a little bit tricky so the fact that you have the home collateral in other words doesn't necessarily mean that you qualify because you might have used the proceeds for something other than the buy, build, or improve so make sure to check the box on line 8 if you had one or more mortgages in 2023 with an outstanding balance and you didn't use all the loan proceeds to buy, build, or substantially improve so the only exception to this limit is for loans taken out on or before October 13th 1987 so they changed the law which is some ways back at this point in time but loans could be quite long quite long in duration so this is one of those areas that once they changed the law it becomes difficult because like I say I would argue that the home mortgage interest probably should not have been in there I don't think it should have been in there in the first place because it is a personal item and all you did was subsidize the home prices which increased the price of the home making it more complex for people to purchase a home without I think really providing value in the long term because the market is just going to adjust for that but once you have put it in place and people have made a 30 year investment based on the structure of the tax code it becomes very difficult to take it out because now you're going to be harming the people that made their investments based on the tax code so what you end up with is having these laws that say I'm going to fix it from this point going forward and then if you were there under the prior law then it still possibly applies in that way so the loan proceeds for these loans are treated as having been used to buy, build or substantially improve the home you can see publication 936 for more information about loans taken out on or before October 13th 1987 you can see publication 936 to figure your deduction if you must check the box on line 8 so if you have to check that box then the question is how do I figure how much of the interest is deductible and you would think that you would do some kind of ratio calculation in other words what's the portion of the loan that you used for the buying, building or improving of the home versus for refinancing your debt or for whatever going on vacation or whatever to help to determine which part of the interest that ratio then you would multiply possibly by the interest amount on the loan because remember what you're going to get is a 1098 and the 1098 isn't, is going to give you the amount of interest that you paid but it's not going to be breaking out the deductible portion versus the non deductible portion based on what you used the loan proceeds for because the bank isn't responsible to oversee what you used the loan proceeds for typically that's not their job the IRS hasn't forced them to do that yet so then you're going to have to take that number on the 1098 and then apply it out or allocate it in accordance to how the loan proceeds were used possibly using some kind of ratio percentage allocation which you can go to the 936 publication for more detail limit on loans taken out on or before December 15th 2017 so this is a ways back for qualified debt taken out on or before December 15th 2017 you can only deduct home mortgage interest up to $1 million $500,000 if you are married filing separately of that debt so note that these limitations are they are pretty high right because again this is a deduction they claim is aimed at everybody being able to own a home but the fact that you have multiple homes that are qualified for which most people don't have like normal people and and they have these pretty high amounts this is not the cost of the home here $1 million we're not talking about the cost of the home we're talking about the loan on the home so in other words usually if you buy a home it used to be that you put 20% down at least right so you put a cash substantial cash amount down and the difference would be the amount that you paid would be the amount that you are going to pay with a loan by taking out a loan okay so the only exception is for loans taken out on or before October 13th 1987 you could see publication 936 for more information about loans taken out on or before October 13th 1987 you could see publication 936 to figure your deduction if you have loans taken out on or before December 15th 2017 that exceed $1 million $500,000 if you are married filing separately so now the question is is the loan over the cap that we're allowed to take and remember that what you're going to get is a 1098 which is the interest taken within the year so then the question is how am I going to figure out if that were the case which it isn't normally that's a pretty high amount but how am I going to figure out if that was the case the deductible portion which again you might have to use some kind of ratio calculation you would expect so limit on loans taken out after December 15th 2017 okay so for qualifying debt taken out after December 15th 2017 you can only deduct home mortgage interest on interest on up to $750,000 $375,000 if you are married filing separately so typically if a married couple has the choice of either filing married filing joint married filing separate can't typically go back to single or head of household unless separated or divorced and typically you're beneficial to file married filing joint normally so if you also have qualifying debt subject to the $1 million limitation discussed under limit on loans taken out on or before December 15th 2017 earlier the $750,000 limit for debt taken out after December 15th 2017 is reduced by the amount of your qualifying debt subject to the $1 million limit and exception exists for certain loans taken out after December 15th 2017 but before April 1st 2018 so in general like going forward this would be the rule that's probably most relevant in your mind because you might have questions about people that are going to be purchasing a home or something like that and the deductibility of the interest noting that anytime someone is thinking about planning situations you're really going to want to use the software to actually run real projections to see what the tax implications are because they do get complex so let's read this top one one more time your qualifying debt taken out after December 15th 2017 can only deduct home mortgage interest on up to $750,000 $375,000 if you are married filing separately of that debt so it's still a pretty high number if you are talking about the cost of the home you might have still bought a million dollar home and then normally you would put a down payment usually it used to be like 20% and the difference is going to be basically the loan amount which still if you bought that that would be a high loan for a large very expensive place if you are not living in California where I am at you might have home purchases or 300,000 or 200,000 or something like that you put the 20% down so again pretty decent limit for average people in America notice that this is another problem by the way with trying to put down a blanket kind of rule like this about purchasing homes over the entire country because it's way more expensive to buy homes in say California for example or New York then many other types of the areas of the country so it's hard to say what would be a fair deduction and again I think they are getting into the weeds of this getting on the personal side of things that actually causes more problems but in any case if the exception applies your loan may be treated in the same manner as a loan taken out on or before December 15, 2017 you can see publication 936 for more information about this exception see publication 936 to figure your deduction if you have loans taken out after October 13, 1987 that exceed the 750,000 375,000 if you are married filing separately ok so then we got the limit when loans exceed the fair market value of the home so if the total amount of all mortgages is more than the fair market value of the home you can see publication 936 to figure your deduction again you would think this wouldn't typically happen because normally if banks are not influenced by some weird regulations and whatnot then they are not going to want to allow the value of the home to be less than the loan value so if you think about if you are a bank and you are going to give out a loan you want to make interest on the loan then if they have $100,000 home with their purchasing that's the purchase price you are going to say something like I want you to put 20% down where I am not going to give you the loan and I am going to use the loan as collateral so that if you default on the payments I can then take the property not because I want it but because I want to sell the property to recoup the loan value that's going to be the idea but if you give 100% loans meaning the home is worth 100,000 and you loan them 100,000 what's going to happen if the value of the loan goes down you can see everything gets messed up because then the people that own the home are saying hey look I am paying a higher price on the loan then is the value of the home there is an incentive for them to abandon the home basically go bankrupt kind of thing and so that doesn't usually happen that's what happened in the housing crisis like 2008 and that's because there were these crazy incentives that were basically manipulating the market in various ways and the banks were taking on large risks but normally that shouldn't happen because if you have a 20% cushion when you purchase the home it's not likely then the market is going to decrease that large of an amount but it could if that happens then you could have a limitation as well okay line 8a enter on line 8a mortgage interest and points reported to you on form 1098 so notice 1098 is different than a 1099 the 1099 represents income typically that you might have received and therefore have to report IRS has the same document so you have to double check that the 1098 is going to be reporting and it's kind of a different situation where the usually when it's income note the incentive to the IRS was they want to go to the person that is paying because they get the deduction right they're going to get a deduction so they want then them to rat out who they gave the money to so that they can make sure that the other guy reports income that's what a 1099 is that's what a W2 is therefore what we have is interest which might be a deduction for us but because it's such a large and significant deduction they're going to put pressure on the big financial institutions the banks that have the loans to actually report not only to us but to the IRS the amount of mortgage interest on the form 1098 so that of course if we report something different than what's on the 1098 we might question us about it and we have to basically kind of justify or show why what we're reporting is different than what's on the 1098 for example typically so unless one or more of the limits on home mortgage interest apply to you so for more information about this limit see limit on home mortgage interest earlier so we've got the home mortgage interest limited so if your home mortgage interest deduction is limited then go to the publication 936 to figure the amount of mortgage interest and points reported to you on form 1098 that are deductible so usually it's pretty straightforward hopefully they're not limited if they are then it's going to get more complex and you can go to the publication to do that calculation or help you with it I only enter on line 8A the deductible mortgage interest on form 1098 refund of overpaid interest if your form 1098 shows any refund of overpaid interest don't reduce your deduction for the refund instead see the instructions for schedule 1 form 1040 line 8Z so this I believe is going to be a similar situation to like what we saw with the state income taxes in other words what happens next year you paid interest and you got a deduction for it in 2022 but for some reason it was wrong you overpaid it and then they gave you a refund in 2023 that means you over deducted in 2022 so should you go back to 2022 amend the return well that would be kind of tedious so I believe the idea would be no we're not going to do that well what do I do then do I reduce in 2023 because of the refund to make up for it that would make sense but the iris is typically going to say no that's not the way we want to do it because it's possible that you sold the home and you don't have any mortgage interest or you're not itemizing in 2023 so what would you do in that case instead like with the state tax refund if that happens you might have to report it in income as other income so similar kind of situation that's fairly unusual to happen because typically the bank's going to get it right with that 1098 but same concept and you can see it's been repeated multiple times if you get the situation with a refund and you're like oh no I have to amend the prior return or oh no I have to adjust the deduction in the current return the answer is probably no you have to see if you got a benefit from it last year and if so compensate for it in the current year by possibly including it in income and above the line like schedule one income so more than one borrower so if you and at least one other person other than your spouse if you file a joint return reliable for and paid interest on a mortgage that was your home you can only deduct your share of the interest so shared interest reported on your form 1098 so if the shared interest was reported on the form 1098 and you received deduct only your share of the interest online 8a so you can imagine a situation where you have a 1098 reporting the interest but you are only allocated a portion of it that's basically your portion well you can only deduct like your portion of it would be the idea let each of the other borrowers know what their share is shared interest reported on someone else's form 1098 so here's where it gets messy so if the shared interest was reported on the other person's form 1098 report your share of the interest online 8b as explained online 8b later so notice that if someone else is getting the 1098 and it's a shared situation and part of that interest should be deductible on your return that's kind of a risky situation you would rather not structure the loan that way typically because the form 1098 is not only going to you but to the IRS so it's so if you report mortgage interest that you don't have a 1098 for it might not be wrong but it could cause more complication so you want to make sure that you do that carefully and I would think through thoroughly if you're talking about how you're going to structure the loan and use that as a last resort but that could happen in some situations form 1098 doesn't show all interest paid so if you paid more interest to the recipient then is showing on form 1098 include the larger deductible amount online 8a and explain the difference so clearly the IRS has the 1098 with a large financial institution you would think that they would get it right get the right number but sometimes you might have other financing other than with large institutions and what not and something they might get it wrong so what do you do well you have to report the correct number you're going to report the correct number and then try to give the notes to the IRS to tell them what happened because the IRS has the number and if you don't give any explanation reporting something different reporting something greater than what's on the 1098 you can expect that they will probably question that so if you are filing a paper return explain the difference by attaching a statement to your paper return and printing quote see attached in quote to the right of the line 8a I think you can do that electronically now too you can fight you can basically say I'm going to attach an addendum a statement which would be like a PDF file to the to the line 8b if you paid home mortgage interest to a recipient who didn't provide you a form 1098 report your deductible mortgage interest on line 8b hopefully that doesn't that's not as common as an occurrence because again you can expect the IRS is going to question that more because they didn't get their 1098 from the financial institution which would give you more verification and support that you have a legitimate deduction so your deductible mortgage interest may be less than what you paid if one or more mortgage interest is applied to you so for more information about these limits see limits on home mortgage interest earlier seller financed mortgage so this is kind of a special type of scenario where the mortgage structure is going to be a little bit different noting that usually if you buy a home what happens is the person selling the home is going to sell the home let's say it's $100,000 home but they have 20,000 on it that they're paying well usually you're going to get a loan to help you to get the 100,000 that you pay to them they're going to take the money and then pay off the 20,000 of their loan and keep the 80,000 and go on their way but you can imagine a situation where you have a different kind of financing structure like a seller financed mortgage so if you paid home mortgage interest to the person from whom you bought the home and that person didn't provide you a form 1098 write that person's name identifying number social security number and address on the dotted lines next to line 8B so if the recipient of your home mortgage payments is an individual the identification number is their social security number SSN otherwise it is the employer identification number the EIN you must also let the recipient know your social security number interest reported on someone else's form 1098 so if you at least one other person other than your spouse is filing jointly reliable for and paid interest on the mortgage and the home mortgage interest paid was reported on the other person's form 1098 identify the name and address of the person or persons who received a form 1098 reporting the interest you paid so now someone else got the 1098 you're going to report it because some of it's allocated to you you want to tell the IRS who got the 1098 so the IRS can still kind of verify it with that 1098 again you would like to avoid that structure of a loan if possible because it's likely to cause confusion don't want to confuse the IRS they cause problems when you do so if you are filing a paper return identify the person by attaching a statement to your paper return and printing see attached to the right of line 8b you might be able to do that in software again as well depending on the software so line 8c points not reported on form 1098 so points are shown on your settlement statement points you paid only to borrow money are generally deductible over the life of the loan so points become a whole nother kind of situation because sometimes there's different terms of what a point actually means so there's that becomes a problem and then the question is well if you're paying points and we're considering the points we're thinking of the points as a prepayment of like a payment of the interest like a prepayment of the interest do I get to deduct the interest at the point in time I pay the points and the IRS argument might be possibly no because you're paying the interest before you've earned it that would be like prepaying the rent or something like that so they might then force you to put the points on the books and kind of like depreciate them which would be the easiest form of depreciating would be basically just taking the points that you got to deduct and deducting an even amount over the life of the loan so if it was a 30 year loan deducting an even amount which usually comes out to a pretty small amount each year of points that possibly can be deductible so questions that come up with points are one are they deductible two if they are deductible did the mortgage company or the financing company put it on the 1098 and then three how do I treat the points are they something that I can deduct in the current period or are they something that I can't deduct or are they something that I'm going to have to depreciate put on the books basically as like a capital asset or an amortizable asset that I'll then expense over the life of the loan possibly using a straight line method although in some cases you might have to use a more complicated method that's a simplified method of straight line which usually will work over the life of the loan which would be like 15 to 30 years is the general idea if they didn't report the points on the 1098 you might have to look at the closing document so if someone purchased a home they're going to have the closing document and you might have to scan through the closing document to make sure that there's a proper allocation of the points and then treat the points accordingly now obviously this is only something that's usually a problem when the home was first purchased where you have to comb over possibly the purchase documentation the closing document after that everything should roll smoothly because you'll get the 1098s which should be properly recorded after that and if you had to record the points on the books and amortize them over the life of the loan you would have done that in the year of purchase and if you're using the same software the amortization should hopefully work and properly calculate in future periods any case see publication 936 to figure the amount the amount you can deduct points paid for other purposes such as for lender services aren't deductible so refinancing generally you must deduct points you paid to refinance a mortgage over the life of the loan this is true even if the new mortgage is secured by your main home so similar situation except this time you had a loan you want to refinance the loan possibly because there are more favorable interest rates on the market than your current interest rate which could result in another kind of closing document similar but much more simple than when you purchase the home which could result in more points which you generally are going to have to basically amortize over the life of the loan so if you use part of the proceeds to improve your main home you may be able to deduct the part of the points related to the improvement in the year paid so in that case you can take a look at publication 936 for more details there tip so if you paid off a mortgage early deduct any remaining points and the year you paid off the mortgage let's say you have the points on the books there's a 15 year loan you've been deducting the points every year for 15 years however now you're going to pay off the loan early they're saying I'm just going to pay it off I've got the money I'm going to pay it off well I still have the points that are still scheduled to be deducted over 15 years because the loan is being paid off now you would think that you would be able to deduct the points at the time that you're paying off the loan however if you refinance your mortgage with the same lender see mortgage ending early in publication 936 for an exception so now you have a situation where you're paying off the loan but you're taking out another loan so do you get to deduct the points of the loans if you're paying off the loan but then you're just refinancing taking out another loan or possibly do you have to take those points and keep on amortizing them possibly to the life of the new loan or to the life of the old loan you know whichever short or something like that if that's a situation you can take a look at publication 936