CARL WATTS & ASSOCIATES

February 02, 2015

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Home Mortgage Points
and Schedule A
Anyone with a mortgage knows that, when it comes to filing their tax returns, they are most probably going for itemized deductions on Schedule A and not the standard deductions.

The IRS allows taxpayers to itemize, or list, certain expenses paid for the tax year as deductions from income.

These deductions are being specifically identified in the tax code as items that benefit the economy (such as home mortgage interest) or are of an unusual or extraordinary nature (e.g. large medical expenses).

If in any year, the amount of itemized deductions is lower than the Standard Deduction, the taxpayer can choose the Standard. There are no penalties for switching from itemized to the Standard and back for any years.

So, since you have a mortgage, you must receive Form 1098 documenting the payment of interest, points and even real estate taxes.

The term points is used to describe certain charges paid to obtain a home mortgage. Points are prepaid interest and may be deductible as home mortgage interest, if you itemize deductions on Form 1040, Schedule A.

If you can deduct all of the interest on your mortgage, you may be able to deduct all of the points paid on the mortgage. If your acquisition debt exceeds $1 million or your home equity debt exceeds $100,000, you cannot deduct all the interest on your mortgage and you cannot deduct all your points.

You can deduct the points in full in the year you pay them, if you meet all the following requirements:

  1. Your main home secures your loan (your main home is the one you live in most of the time).

  2. Paying points is an established business practice in your area.

  3. The points paid were not more than the amount generally charged in that area.

  4. 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.

  5. The points paid were not for items that are usually listed separately on the settlement sheet such as appraisal fees, inspection fees, title fees, attorney fees, or property taxes.

  6. The funds you provided at or before closing, including any points the seller paid, were at least as much as the points charged. You cannot have borrowed the funds from your lender or mortgage broker in order to pay the points.

  7. You use your loan to buy or build your main home.

  8. The points were computed as a percentage of the principal amount of the mortgage, and

  9. The amount shows clearly as points on your settlement statement.

You can also fully deduct (in the year paid) points paid on a loan to improve your main home if you meet tests one through six above.

Points that do not meet these requirements may be deductible over the life of the loan. You can deduct points paid for refinancing generally only 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 above, you can fully deduct the part of the points related to the improvement in the year you paid them with your own funds. You can deduct the rest of the points over the life of the loan.

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.


Points paid by the seller of a home cannot be deducted as interest on the seller's return, but they are a selling expense that will reduce the amount of gain realized.

The buyer may deduct points paid by the seller, provided the buyer subtracts the amount from the basis or cost of the residence. You can only deduct points you pay on loans secured by your second home over the life of the loan.

You may be subject to a limit on some of your itemized deductions, including points.

For 2014, itemized deductions may be reduced for taxpayers with Adjusted Gross Income (AGI) above:

  • $305,050 for married filing joint or qualifying widow(er),
  • $279,650 for head of household,
  • $254,200 for single,
  • $152,525 for married filing separate.

The AGI thresholds for 2015 are:

  • $309,900 (married joint-filing couples),
  • $284,050 (heads of households),
  • $258,250 (single filers),
  • $156,000 (married filing separately).


If your AGI exceeds the amount listed for your filing status, your itemized deductions will be reduced by the lesser of:

  • 3% of the AGI above the amount listed for your filing status or
  • 80% of the amount of itemized deductions otherwise allowable.

These limits are tied to official CPI measures and hence are adjusted for inflation every year.

As the 2015 tax season has already started, we urge you to contact a tax professional to make sure you take advantage of all the deductions you are entitled to, and in general in all your dealings with the IRS.
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