If you bought a home in 1995, make sure you get the benefit of closing cost tax deductions as well as annual mortgage interest deductions.
When you closed on your transaction, you may have paid up-front interest, which is deductible. Up-front interest is sometimes called "points," "loan origination fees," "maximum loan charges," "loan discount" or "discount points."
To be deductible, these up-front charges must have been paid at closing and the lender must have considered them to be prepaid interest. If the lender charged a fee as payment for the use of the money, as opposed to payment for services performed, it's deductible.
And, thanks to a 1994 tax rule change, you can deduct up-front interest
even if the seller (or builder in the case of a new home) paid it for you.
Be sure, however, that you do not include fees for appraisal, notary services and loan preparation in your deductions. These fees are not considered prepaid interest; they are payment for services performed.
Depending on your transaction and loan, qualifying charges are either deducted proportionally over the life of the loan or entirely in the year you purchased the home.
You can also deduct amounts you paid, beginning on the date the transaction closed, for allowable home mortgage interest and property taxes.
If you paid $600 or more in mortgage interest during a year, your lender should have sent you Form 1098, which shows the total interest and any deductible points you paid during the year. If you did not receive this form, call your lender.
These deductions can be substantial, so review them carefully. "A homeowner could save hundreds of dollars each month," says Steve David, a real estate tax instructor and president of Century 21 TriCity Realty Inc.
For example, David explains, homeowners who have mortgaged $100,000 may pay roughly $6,000 in mortgage interest and $3,000 in property taxes (depending on where the home is located) each year. Assuming that these fees qualify as deductible expenses, homeowners in the 28 percent tax bracket could save $2,520 each year, or $200 a month, in income taxes.
To find out more about these deductions or other tax breaks for homeowners, contact a tax professional, call the IRS at 800/829-1040 or review the following IRS publications: Home Mortgage Interest Deduction (Pub. 936), Tax Information for First-Time Homeowners (Pub. 530), Moving Expenses (Pub. 521) and Selling Your Home (Pub. 523). You can find most of these publications in your local library.
On the Internet, you can find more information on the IRS site http://www.fedworld.gov/.