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Did you pay points in 2022 when you took out the loan?

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March 12, 2024
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Hi

I am entering my 1098 form details in mortgage section.

I get to the part where it asks me this question-

"Did you pay points in 2022 when you took out the loan?" I see two options-

1. "We paid points when we refinanced, purchased a second home, or opened a home equity loan in 2022."

2. "We have already deducted all the points we paid in 2022, or we didn't pay any points."

Now, I did pay discount points to secure my interest rate for 6 months in 2022. But none of these options make sense. 1. looks correct except it says "second " home or home "equity" loan. Both does not seem right.

If I choose 1 anyway, I see this "Is this 1098 the most recent for your loan?" What would be the answer to this? Is it asking about 2023's 1098 form or 2022's 1098 form (which has details on points I paid for obvious reasons)?

Then, finally after answering other questions I get to "Your mortgage interest is being limited". I think I understand this part - since my loan is 1M, some maths is happening and letting me use portion of the interests for tax savings. I also see something called "Points not on a 1098". What is that? Website does not explain.

Interesting part is- If I dont choose any option on this question- "Did you pay points in 2022 when you took out the loan?" I am getting a bigger tax refund. None of this is making sense to me.

I also would like to know how these points are going to be used. I took loan in 2022 so how can I use those points for some tax benefit now? I did try to use Itemized deduction last year but it did not come close to standard deduction so did not use it.

P.S. This is my first and primary house.

Best answer by KrisD15

The tax law is this:

When points are charged on a loan, the amount charged as points is considered "Pre-paid Interest".

If it is an "original loan" the TOTAL amount of points paid can be claimed, in addition to the year's worth of interest, as a deduction (subject to Itemizing) the year the loan is made.

If it is a HELOC or refinanced loan, the amount of the points need to be amortized (spread out) over the life of the loan.

If you had you entered the 2022 Form 1098 with the points reported, the program would have added the total of the points as interest.

You did not Itemize, therefore you did not claim the interest or the total points.

HOWEVER-

According to the IRS:

"Deduction Allowed in Year Paid
You can fully deduct points in the year paid if you meet all the following tests. (You can use Figure B as a quick guide to see whether your points are fully deductible in the year paid.)

Your loan is secured by your main home. (Your main home is the one you ordinarily live in most of the time.)
Paying points is an established business practice in the area where the loan was made.
The points paid weren't more than the points 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. Most individuals use this method.
The points weren't paid in place of amounts that are ordinarily stated separately on the settlement statement, such as appraisal fees, inspection fees, title fees, attorney fees, and property taxes.
The funds you provided at or before closing, plus any points the seller paid, were at least as much as the points charged. The funds you provided aren't required to have been applied to the points. They can include a down payment, an escrow deposit, earnest money, and other funds you paid at or before closing for any purpose. You can't have borrowed these funds from your lender or mortgage broker.
You use your loan to buy or build your main home.
The points were figured as a percentage of the principal amount of the mortgage.
The amount is clearly shown on the settlement statement (such as the Settlement Statement, Form HUD-1) as points charged for the mortgage. The points may be shown as paid from either your funds or the seller's.

Note. If you meet all of these tests, you can choose to either fully deduct the points in the year paid, or deduct them over the life of the loan."

Therefore you also have the option to claim the points over the life of the loan.

I have not seen this option in the TurboTax software, therefore you might need to "Trick the Software" by saying Yes, it was refinanced, and yes you paid points in 2022. Enter the points paid in 2022. This will force the software to amortize the points.

BE SURE TO INDICATE THAT NO CASH WAS TAKEN OUT, that the entire loan was used to "Build, Buy, or Improve" the property.

This should result in the additional interest added to the Home Mortgage Interest Deduction.

If the interest is limited because of your loan balance, the addition of the points should still increase the deduction.

This "stretching of the truth" is not reported on your return, it is information used on the TurboTax worksheets, and suggested as a "work-around" to get the proper calculation that is reported on your 1040.

LindaS5247

Please clarify your question by providing additional information. Did you deduct points in 2022? Does your 2023 Form 1098 show points? Are you itemizing this year?

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A

ahk1Author

No, i did not use itemized deduction for 2022 taxes as it was coming up less than the standard deduction.

My 2023’s 1098 does not show loan points i paid in 2022. My 2022’s 1098 show the loan points in box 6.

yes i am going to do itemized deduction this year as it is coming up more than the standard deduction.

KrisD15Answer