Internal Revenue Service (IRS) allows the deduction of the discount points on
your income tax return. Discount points which are one of the most important tax
deductions to homebuyers are paid upfront to reduce the mortgage payment.
Calculate the Discount PointsEach point equals one
percent of the principal. For example, a 2 discount points on $150,000 mortgage
comes to $3,000 ($150,000 x 0.02). The Closing Statements shows how much is your
discount points. If you do not see discount points, have no fear. Discount
points are also called Loan Origination Fees, Maximum Loan Charges, or Loan
Discount.
First Time Homebuyer Discount Points For a first
time buyer, IRS allows to claim the full amount of
discount points on the year paid. For example, Joe bought his first home on 2005. In
his closing statement, the discount points come to $3,000. Joe claims the full
amount on Schedule A of his income tax return.
Discount Points on
refinance without home improvementThe homeowners claim the full
amount of discount points, when the homeowners refinance towards the improvement
of the home. Without the home improvement, the homeowners claim the discount
points over the life of the mortgage. For example, Joe refinances his home with
a lower interest rate on a 25 year mortgage. The closing statement shows $3000
discount points. Joe claims $120 per year ($3,000 / 25 year
mortgage).
Discount Points on refinance with home
improvementThe discount points which are paid to improve the home is
fully tax deductible on the year paid. The rest are claim over the life of the
loan. For example, Joe refinances his home to add a swimming pool on a 25 year
mortgage. He paid $20,000 to add a swimming pool. The total mortgage comes to
$150,000. The closing statement states $3,000 discount points. Joe claims $400
($20,000 swimming pool / $150,000 principal x $3,000) $104 per year ([$3,000
discount points - $400 discount points of swimming pool] / 25 year
mortgage).
If the homeowner has an outstanding discount points to claim,
the homeowner claims the outstanding discount points on the year of refinance.
For example, Joe has $2,000 discount points which are not claimed yet. Joe
claims a total of $2,504 ($2,000 outstanding discount points $400 swimming
pool discount points $104 per year discount points).
IRS yearly
updateThis article may or not contain the most current tax
regulations, and laws. You may want to consider checking with your trusted Tax
Advisor or IRS.
