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Interest Schedule A

Schedule A Explained: Mortgages and Investment Interest

Welcome to “Schedule A Explained”. For new readers, this series is dedicated to helping taxpayers understand Schedule A and how to best itemize deductions. In Part 2 of this series, we took a look at taxes, mainly state and local income taxes. And now in Part 3 we are moving right down Schedule A, towards the middle of the form. Talking about all the interest that you can take as deductions.

Mortgage Interest

Have you recently bought a house? Are you part of the super majority of home owners that have a mortgage? Good, well sort of. Paying money isn’t fun. Fortunately though, in most cases mortgage interest is deductible. However, after the passage of the Tax Cuts and Jobs Act, the amount of interest that you can claim is limited. For qualifying home loans taken after December 15th, 2017, you can deduct the interest on up to $750,000 of home mortgage debt. For loans taken after December 15th, 2017 though, you can deduct interest on up to $1,000,000 of home mortgage debt. But what is qualifying debt? Qualifying debt is the loan proceeds that are used to buy, build, or substantially improve the home securing the home loan.

Mortgage Interest and Points From Form 1098

Mortgage points, are fees paid directly to the lender at closing, in exchange for a reduced interest rate. One point costs 1 percent of your mortgage amount ($1,000 for every $100,000 of home loan). Generally people get mortgage points for the purpose of paying a lower rate. This is useful for people that plan to stay in their houses over a longer period of time. This is because the lower payment will eventually, save you enough money to cover the cost of the mortgage points.

Mortgage points are found on Form 1098, which is then carried onto Schedule A as a deduction. In short, Form 1098 is a summary of mortgage related items that your bank gives you, summarizing the payments you have made on the mortgage each year. It’s purpose is kind of similar to 1099’s, in that you get form from a brokerage firm or from your bank, that states how much interest they paid you, or how your investments did performance wise.

Investment Interest

What is investment interest? Or more importantly, how does the Internal Revenue Service define what investment interest is? Well for tax purposes, investment interest is interest paid on money borrowed that is allocable to property held for investment. Also please note, that it doesn’t include any interest allocable to passive activities or to securities that generate tax-exempt income.

In order to claim the deduction for qualified investment interest you’ll want to fill out Form 4952. In short Form 4952, combines disallowed investment interest from the previous year and combines it with investment interest in the current year. You then follow the form to get your total investment income. Then you subtract your investment expenses from your investment income, to get your net investment income. After that, you then subtract the net investment income from the total investment interest expenses. The result will be your disallowed interest for the year. The smaller of the total investment interest expense or the net investment income will become the investment expense deduction.

Conclusion

In conclusion mortgage interest, is very self explanatory. And with the exception of the mortgage debt limit, it’s pretty easy to understand. In short, you’ll mostly just need to follow the 1098 that your lender will give you. Which is a summary of all mortgage related items for the year. However investment interest becomes a little more complicated and requires you to fill out Form 4952. As always, understanding tax forms is great, but hiring a CPA, is even better.