Avoid common mistakes when claiming this tax break for homeowners.
Money Girl
260 MG Deduction Dangers, Part 1: Mortgage Interest
Hey, Fidelity, what's it cost to invest with the Fidelity app? Start with as little as $1 with no account fees or trade commissions on US stocks and ETFs. Hm, that's music to my ears. I can only talk. [MUSIC] Investing involved risk, including risk of loss, zero account fees apply to retail brokerage accounts only. Sell or assessment fee not included, a limited number of ETFs are subject to a transaction-based service fee of $100. See full list at Fidelity.com/commissions. Fidelity brokerage services LLC, member NYSE SIPC. [MUSIC] At Credit Union of Colorado, banking doesn't have to be like this. Big National Banker here, just saying we like to apologize to you for that thing we did. Was it selling your information, canceling your personal loan? Who can say that's for the lawyers to figure out? So just no, it's not going to happen again. Until it does, again. At Credit Union of Colorado, we have better interest rates and seamless mobile banking. All while having a heart, Credit Union of Colorado, honestly, good. Learn more at honestlygood.org, federally insured by NCUA. [MUSIC] Hi, friends. Thanks for downloading the Money Girl Podcast. [SOUND] I'm Laura Adams, the author of Money Girl's Smart Moves to Grow Rich. To get you ready for tax day, we're bringing you bonus episodes of Money Girl this week in a special three-part series called Deduction Dangers. Where I'll be giving you tips to avoid common tax mistakes that can cost you. In this show, we'll cover the mortgage interest deduction. Taking this tax break is one of the best ways for homeowners to save money on taxes. So if you're a homeowner or you want to be one someday, listen up. You'll get an overview and three common mistakes you need to avoid. A tax deduction isn't a mount you can subtract from your taxable income, which reduces the amount of tax you have to pay. When you borrow money to buy, build, or remodel your home, the mortgage interest deduction allows you to avoid paying tax on the interest. Let's say you get a fixed rate mortgage of $200,000 for 30 years with a 4.5% interest rate. Your payment for principal and interest would be just over $1,000 a month or $12,000 a year. In the first year, the interest portion of your payments would total over $8,900. If you claim the mortgage interest deduction, that's $8,900 of your income that won't be taxed. Depending on your tax rate, claiming the deduction could reduce what you owe or increase your tax refund by thousands of dollars. In order to be eligible to take the mortgage interest deduction, you have to meet the following two conditions. Number one, you must file taxes on Form 1040 and itemize deductions on Schedule A. There are two ways to claim your tax deductions. Take a standard deduction or itemize. You get to choose the method that gives you the lowest tax bill and saves you the most money. Here are the standard deductions for 2012. If you're married in file taxes jointly, your standard deduction is $11,900. For those who file as head of household, it's $8,700. And if you're single or married in file taxes separately, it's $5950. So if you're single and the total of all your eligible deductions, four expenses like mortgage interest, property taxes, charitable contributions, and a certain amount of medical expenses is more than the standard deduction of $5950, then you'll come out ahead by itemizing. To see a complete list of all the deductions you can claim, just take a look at Schedule A. I'll put a link to it in the transcript for this podcast, which is episode number 260, on the MoneyGirl page at quickanddirtytips.com. The second requirement to claim the mortgage interest deduction is that your mortgage must be a secured debt on a qualified home in which you have an ownership interest. A debt is secured when you sign a legal document, such as a mortgage, deed of trust, or a land contract that allows the lender to sell the property if you don't repay the loan. You can deduct interest paid on mortgage balances up to a million dollars. Additionally, interest paid on up to $100,000 of home equity loans or lines of credit is generally tax deductible. Now that you know the basics about the mortgage interest deduction, let's cover three specific mistakes about claiming it that can trip you up and cost you money. Mistake number one, getting confused by Form 1098. Lenders send out a mortgage interest statement called Form 1098 when you pay at least $600 of interest during the year. What's confusing about this statement is that when there are multiple borrowers, a lender may only list one of them and send it to that person only. Let's say you couldn't qualify for a mortgage by yourself, so your dad co-signed a mortgage with you. You live in the house by yourself and make all the payments. If the lender sends Form 1098 to your dad, you may not realize that you're eligible to claim a deduction for the full amount of mortgage interest that you paid. Additionally, your dad may mistakenly believe that he's entitled to the deduction because he received the form. Remember that no matter who receives Form 1098, each borrower is only entitled to deduct the amount of mortgage interest that he or she actually paid during the year. If you own a home with someone else and they receive Form 1098, simply ask for a copy or file a paper tax return and attach a document that explains why you don't have a copy of Form 1098 and how much interest each borrower paid during the year. 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So make an impact on your child's learning, get Ixcel now, and money girl listeners can get an exclusive 20% off Ixcel membership when they sign up today at ixl.com/moneygirl. Visit ixl.com/moneygirl to get the most effective learning program out there at the best price. At Credit Union of Colorado, banking doesn't have to be like this. Big national banker here to let you know we are increasing fees again. Now, some people will say they are hidden fees, and if I had my choice, I'd hide them. But I guess that's not legal. So for now, please reference line 572 on page 36 for all new fees this month. At Credit Union of Colorado, we have better interest rates, seamless mobile banking, and no hidden fees. Ever. Credit Union of Colorado. Honestly, good. Learn more at honestlygood.org, federally insured by NCUA. Imagine earning a degree that prepares you with real skills for the real world. Capella University's programs teach skills relevant to your career so you can apply what you learn right away. Learn how Capella can make a difference in your life at Capella.edu. Mistake #2. Claiming a deduction for someone else's debt. The second mistake to avoid is claiming the mortgage interest deduction on a loan that isn't yours. A podcast listener named Lindsay asks, "I live with my boyfriend in a house that he owns. He's been out of work for some time and I've been making the mortgage payments. Can I deduct the mortgage interest?" The answer is no. You can only deduct your share of mortgage interest on debt that you own. So no matter how much mortgage interest you pay for someone else, you can't take a deduction for it unless you have an ownership interest in the property. Mistake #3. Claiming the wrong deduction amount. The third common mistake with the mortgage interest deduction is claiming too much of your share. There's a common question from a reader named Walt. My partner and I co-own a home and each pay 50% of the mortgage. I'll have enough total deductions to itemize, but she won't. If she claims the standard deduction on her tax return, can I claim 100% of the interest deduction on my return? If you own a home with a spouse and file taxes together, you can claim the total amount of mortgage interest on a joint tax return. However, if you're married and file taxes separately or you have a mortgage with someone who isn't your spouse, like Walt, you can't pull the deduction. As I previously mentioned, each borrower can only claim the interest that he or she pay during the year. So Walt can only claim 50% of the mortgage interest. It's important to take advantage of every tax break that you can because they legally reduce the amount you have to pay the government. So if you own a home or a portion of a home, be sure to deduct your allowable mortgage interest. If you have a complicated situation, it's a good idea to consult with a qualified tax accountant. Stay tuned for dangers about other tax deductions in the next two bonus episodes. You'll find a transcript of each podcast on the Money Girl page at quickanddirtytips.com. And while you're there, get more money tips by signing up for the free Money Girl newsletter. Also, join the Money Girl Facebook page, connect with me on Google+, and follow on Twitter, where my username is @LaraAdams, L-A-U-R-A-A-A-M-S, with no space. I'm glad you're listening to Ching. That's all for now. Courtesy of Money Girl, your guide to a richer life. At Credit Union of Colorado, banking doesn't have to be like this. Big National Banker here, just saying we'd like to apologize to you for that thing we did. Was it selling your information, canceling your personal loan? Who can say? That's for the lawyers to figure out. No, it's not going to happen again. Until it does, again. At Credit Union of Colorado, we have better interest rates and seamless mobile banking. All while having a heart, Credit Union of Colorado. Honestly, good. Learn more at honestlygood.org, federally insured by NCUA. Imagine earning a degree that prepares you with real skills for the real world. Capella University's programs teach skills relevant to your career so you can apply what you learn right away. And how cappella can make a difference in your life at cappella.edu. [BLANK_AUDIO]