How Do I Claim My Refinance on My Taxes?

Refinancing a mortgage can adjust your monthly payments and loan terms, with specific considerations for your annual tax filing. While refinancing is not a taxable event, certain expenses incurred during the process may be deductible, lowering your tax liability. This article clarifies which expenses are eligible, the necessary documentation, and how to report these deductions on your federal tax return.

Identifying Deductible Refinance Expenses

A significant deduction related to a mortgage is for the interest you pay. You can deduct interest on up to $750,000 of “acquisition debt,” which is debt used to buy, build, or substantially improve your main home or a second home. For mortgages that originated before December 16, 2017, the previous limit of $1 million in acquisition debt still applies.

A cash-out refinance complicates the interest deduction. If you refinance for more than your mortgage balance and use the cash for non-home improvement purposes, that portion is home equity debt. Interest on home equity debt is not deductible, so you must calculate the percentage of the new loan that is acquisition debt and apply it to the total interest paid.

Another deduction is for mortgage points, a form of prepaid interest also called loan origination fees. Unlike points on an original home purchase, refinance points must be deducted over the life of the loan through amortization. For example, if you paid $3,600 in points on a 30-year (360-month) loan, you could deduct $10 for each month you have the loan.

If part of your refinance proceeds was used for substantial home improvements, the portion of the points related to those funds may be fully deductible in the year you paid them. This requires careful allocation based on how the loan proceeds were used. If you refinance the same loan a second time, any unamortized points from the previous refinance may become fully deductible in the year of the subsequent transaction.

Many costs associated with refinancing are not deductible. These non-deductible closing costs include appraisal fees, title insurance, legal and recording fees, and inspection fees. These expenses are considered costs of obtaining a loan, not prepaid interest, and therefore do not qualify for a tax deduction.

Required Documentation and Information

To claim any eligible deductions from your refinance, you must have specific documents from your lender. A primary document is Form 1098, the Mortgage Interest Statement. Your lender is required to send this form if you paid $600 or more in mortgage interest during the year, and it reports the total interest you paid in Box 1.

While Form 1098 is a starting point, it may not tell the whole story for a refinance. Box 6 of the form is designated for points paid on the purchase of a principal residence, so for a refinance, this box may be blank or show an amount that doesn’t reflect what you actually paid. This is why your closing paperwork is necessary for substantiating your deductions for points.

The Closing Disclosure or a similar settlement statement is a key document from your loan closing. You must review this document carefully to identify the exact amount you paid for points, often labeled as “loan origination fees” or “discount points.” This statement provides the necessary proof of payment and the total amount that you can then amortize.

Reporting Deductions on Your Tax Return

Claiming deductions for mortgage interest and points requires you to itemize deductions on Schedule A (Form 1040). You should only choose to itemize if your total itemized deductions, including mortgage-related expenses, state and local taxes (up to a $10,000 limit), and charitable contributions, exceed the standard deduction for your filing status.

Once you determine that itemizing is beneficial, you will report your deductible amounts on Schedule A. The total deductible home mortgage interest, adjusted for any non-deductible cash-out proceeds, is entered on line 8a. This figure should only include interest on qualifying acquisition debt.

The deductible portion of your mortgage points is also reported on Schedule A. The annual amortized amount you calculated is included with your mortgage interest on line 8a. The IRS instructs taxpayers to include deductible points on this line without showing them separately. If you are eligible to deduct the full amount of points related to home improvements in the year they were paid, that amount is also included on the same line.

After filing your return, it is important to maintain proper records. You should keep a copy of your tax return along with supporting documents, including Form 1098 and the Closing Disclosure from your refinance. These documents serve as proof of the deductions you claimed in the event of an IRS review.