Tax Deduction For Mortgage Charges
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The IRS provides specific information on allowable deductions for mortgage “points” which is the term the IRS uses to describe certain mortgage charges.
For more information on points, refer to IRS Publication 936, Home Mortgage Interest Deduction
It is listed under Topic 504 - Home Mortgage Points
The term “points” is used to describe certain charges paid to obtain a home mortgage.
Points may be deductible as home mortgage interest, if you itemize deductions on Form 1040, Schedule A (PDF).
If you can deduct all of the interest on your mortgages, you may be able to deduct all of the points paid on the mortgage. For information on deducting interest, refer to Topic 505.
You can deduct the points in full in the year they are paid, if all the following requirements are met:
- Your loan is secured by your main home (your main home is the one you live in most of the time).
- Paying points is an established business practice in your area.
- The points paid were not more than the amount generally charged in that area.
- You use the cash method of accounting. This means you report income in the year you receive it and deduct expenses in the year you pay them.
- The points were not paid for items that usually are separately stated on the settlement sheet such as appraisal fees, inspection fees, title fees, attorney fees, or property taxes.
- You provided funds at or before closing, that were at least as much as the points charged, not counting points paid by the seller. You cannot have borrowed the funds from your lender or mortgage broker in order to pay the points.
- You use your loan to buy or build your main home.
- The points were computed as a percentage of the principal amount of the mortgage, and
- The amount is clearly shown on your settlement statement.
Notes & Qualifying Comments:
1. Points that do not meet these requirements may be deductible over the life of the loan.
2. Points paid for refinancing generally can only be deducted over the life of the new mortgage.
However, if you use part of the refinanced mortgage proceeds to improve your main home and you meet the first six requirements stated previously, you can fully deduct the part of the points related to the improvement in the year you paid them with your own funds.
3. Points charged for specific services, such as:
- preparation costs for a mortgage note,
- appraisal fees or notary fees
are not interest and cannot be deducted.
4. Points paid by the seller of a home cannot be deducted as interest on the seller’s return, they are a selling expense which will reduce the amount of gain realized.
5. Points paid by the seller may be deducted by the buyer provided the buyer subtracts the amount from the basis, or cost, of the residence.
6. Points you pay on loans secured by your second home, can be deducted only over the life of the loan.
7. You may be subject to a limit on some of your itemized deductions, including points, for more information on the adjusted gross income limitations please refer to the Form 1040 Instructions.
Learn more about tax deductions at www.taxassistonline.com
$2,000 Tax Deduction For Clean-Fuel Vehicle Credit
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$2,000 Tax Deduction
The certification means taxpayers who purchase any of these new hybrid vehicles may claim a tax deduction of up to $2,000 for tax year 2005.
(The deduction started off as $2,000 in tax year 2002 and reduced to $1,500 for tax year 2004 and raised again for 2005.)
You can claim a deduction for the incremental cost of buying a motor vehicle that is propelled by a clean-burning fuel - which typically refers to vehicles that are commonly known as “hybrids”.
By combining an electric motor with a gasoline-powered engine, these hybrid vehicles obtain greater fuel efficiency and produce fewer emissions than similar vehicles powered solely by conventional gasoline-powered engines.
How To Claim
You must use Form 1040, not one of the shorter forms, to claim this deduction.
You should put “Clean-Fuel” and the deduction amount on the dotted line to the left of line 35, including this amount in that line’s total adjustments to income.
(You would have used line 33 on the 2003 Form 1040; line 34 on the 2002 form; line 32 the previous two years.)
Claiming A Deduction For Earlier Years
Qualifying individuals who did not claim the deduction when they filed may claim it on an amended return (Form 1040X). Generally, taxpayers may amend returns up to three years from the original return’s due date.
Qualifying Vehicles
The IRS has certified the following vehicles as being eligible for the clean-fuel vehicle deduction:
Ford Escape Hybrid — Model Year 2006
Mercury Mariner Hybrid — Model Year 2006
Lexus RX 400h — Model Year 2006
Ford Escape Hybrid — Model Year 2005
Toyota Prius — Model Years 2001 through 2006
Toyota Highlander Hybrid — Model Year 2006
Honda Insight — Model Years 2000 through 2005
Honda Civic Hybrid — Model Years 2003 and 2005
Honda Accord Hybrid — Model Year 2005
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