When you took out a mortgage to buy your home, did you pay points? You may be able to deduct that prepaid interest on your federal tax return — but only if you meet a long list of rules.

The points you paid when you signed a mortgage to buy your home may help cut your federal tax bill. With points, sometimes called loan origination points or discount points, you make an upfront payment to get a particular rate from the lender.

Since mortgage interest is deductible, your points may be, too.

If you itemize your deductions on Schedule A of IRS Form 1040, you may be able to deduct all your points in the year you pay them.

Some high-income taxpayers have their total itemized deductions limited, including points. You can read more about that in the instructions for Schedule A.

Lucky for you, the IRS doesn’t care whether you or the homesellers paid the points. Either way, those points are your deduction, not the sellers’.

Tip: Tax law treats home purchase mortgage points differently from refinance mortgage points. Refinance loan points get deducted over the life of your loan. So if you paid $1,000 in points for a 10-year refinance, you’re entitled to deduct $100 per year on your Schedule A.

The Fine Print for Deducting Points

The IRS rules for deducting purchase mortgage points are straightforward, but lengthy. You must meet each of these seven tests to deduct the points in the year you pay them.

1. Your mortgage must be used to buy or build your primary residence, and the loan must be secured by that residence. Your primary home is the one you live in most of the time. As long as it has cooking equipment, a toilet, and you can sleep in it, your main residence can be a house, a trailer, or a boat.

Points paid on a second home have to be deducted over the life of your loan.

2. Paying points must be a customary business practice in your area. And the amount can’t exceed the percentage normally charged. If most people in your area pay one or two points, you can’t pay 10 points and then deduct them.

3. Your points have to be legitimate. You can’t have your lender label other things on your settlement statement, like appraisal fees, inspection fees, title fees, attorney fees, service fees, or property taxes as “points” and deduct them.

4. You have to use the cash method of accounting. That’s when you report your income to the IRS as it comes in and report your expenses when you pay them. Almost everybody uses this method for tax accounting.

5. You must pay the points directly. That is, you can’t have borrowed the funds from your lender to pay them. Any points paid by the seller are treated as being paid directly by you.

In addition, monies you pay, such as a downpayment or earnest money deposit, are considered monies out of your pocket that cover the points so long as they’re equal to or more than points. Say you put $10,000 down and pay $1,000 in points. The downpayment exceeds the points, so your points are covered and therefore you can deduct them if you itemize. If you were to put nothing down but you paid one point, that $1,000 wouldn’t be deductible.

6. Your points have to be calculated as a percentage of your mortgage. One point is 1% of your mortgage amount, so one point on a $100,000 mortgage is $1,000.

7. The points have to show up on your settlement disclosure statement as “points.” They might be listed as loan origination points or discount points.

Tip: You can also fully deduct points you pay (for the year paid) on a loan to improve your main home if you meet tests one through five above.

Where to Deduct Points

Figured out that your points are deductible? Here’s how you deduct them:

Your lender will send you a Form 1098. Look in Box 2 to find the points paid for your loan.

If you don’t get a Form 1098, look on the settlement disclosure you received at closing. The points will show up on that form in the sections detailing your costs or the sellers’ costs, depending on who paid the points.

Report your points on Schedule A of IRS Form 1040.

There are two things related to points that you can’t deduct:

1. Interest buy-downs your builder paid

Some builders put money in an escrow account (as a buyer incentive) that the lender taps each month to supplement your mortgage payment. Those aren’t considered points even though the money is used for an interest payment and it’s prepaid. You can’t deduct the money the builder put into that escrow account.

2. Interest payments from government programs

You can’t deduct points paid by a federal, state, or local program, such as the federal Hardest Hit Fund, to help you if you’re experiencing financial trouble.

This article provides general information about tax laws and consequences, but shouldn’t be relied upon as tax or legal advice applicable to particular transactions or circumstances. Consult a tax professional for such advice.

Looking for a new home? Homes for sale in Dayton, Ohio? Call Kelly Nation HER Realtors Dayton or visit my website at: www.kellynation.com

Set Goals for Home ownership Saving for a down payment can seem like an overwhelming task if you’re on a tight budget. It’s not easy to make a plan, stay on that plan no matter what, stay motivated even when your plan goes temporarily awry, and finally achieve your desired result. So how do you get from, ‘I want to to be a homeowner’ to ‘Give me the keys?’ Simple: Set a goal.

Goal setting involves establishing specific, measurable, realistic and time-targeted goals.

So how does that relate to your down payment? When it comes to buying a home and getting together the money required, there are tricks and tips you can use to make it easier and make that goal achievable.

Make a plan and write it down

Get out a piece of paper or type into your phone/computer a definitive statement that encompasses your down payment goal. Then break down that goal by the amount you need to save weekly, or monthly, and a goal date for being able to buy that house. The simple act of putting your plan down on paper (or on screen) makes it real. Take out the piece of paper or pull up the email you wrote to yourself whenever you need a pick-me-up.

Make some budget cuts

It may not be easy. But saving for something as important as a new home is worth it. Look over your monthly bank statements for areas to cut back. Take out any set monthly expenses—rent or existing house payment, car payment, or anything else that can’t change.

Then look at your car and health insurance policies, or anything else that could change, if you made changes to your coverage.

Don’t forget things like cell phone bills, cable, or high-speed internet. If you’re not using all of your data on your cell phone plan, that may be a place to trim. Perhaps you don’t need such fast internet service. Every little bit helps.

Let someone else make some cuts

If you’ve gone through your budget carefully and don’t see any (or many) easy places to cut, let a best friend or close family member take a look at your budget. They might see some things you don’t, or might be able to ask some hard questions you aren’t willing to ask yourself.

Know how to bounce back

So you went out to lunch with a friend and the next thing you know, you’re at the mall spending money on clothes. Go ahead and feel the pain of the buyer’s remorse. Slap yourself on the hand and get back on your plan. It’s like cheating on a diet, just get back on the plan the next day and proceed ahead.

Look for ways to make extra money

Do you have skills you could use to bring in a few bucks?

Eat-in

Are you currently eating out five nights a week? Cut back to two. If you’re not a fan of cooking, grab a roasted chicken from the supermarket and a bagged salad, or a ready-to-nuke meal from a specialty market. Not ready to give up your restaurant habit? Those coupon packs that come in the mail actually have some useful stuff inside, including restaurant discounts. If you can save 20 percent off your bill a couple times a week, you won’t feel so guilty for dining out.

Another great way to save when eating out is by timing it to nights when restaurants have happy hours, specials, like kids’ eat free nights. Googling these phrases will give you a list of participating restaurants in your area.

Don’t become a hermit

Cutting back doesn’t have to mean locking yourself in your house, never using any gas, never going to any movies or seeing your friends socially. But make sure your friends and family know about your plan so they can support you while you’re saving. And you can involve them in your plan by enlisting their help to plan fun and free (or cheap) get-togethers.

Keep your eye on the prize

When everyone runs off to Mexico for their summer vacation, you’re probably going to want to chuck it all. But remember that Mexico isn’t going anywhere. You can luxuriate on the beach with turquoise water lapping at your feet while you drink that margarita next year. And it’ll taste so much better with the new set of house keys in your pocket.

For more tips on how to set goals for buying a home and suggestions about low down payment options that are available, contact me, Kelly Nation, REALTOR® HER Realtors Dayton.

Looking for a new home? Homes for sale in Dayton, Ohio? Call Kelly Nation HER Realtors Dayton or visit my website at: www.kellynation.com