What Does 1098 Box 6 Mean for Mortgage Points Paid?

Tax season brings a flurry of forms and numbers, each with its own significance. Among these is Form 1098, which homeowners receive from their mortgage lenders. One key section on this form is Box 6, where information about mortgage points paid is reported.

Understanding Box 6 is crucial for taxpayers seeking to maximize deductions related to homeownership expenses. This section explores why Box 6 matters, particularly regarding the tax implications of mortgage points.

The Purpose of Box 6

Box 6 on Form 1098 reports the total mortgage points, or “discount points,” paid during the tax year. These points are prepaid interest borrowers pay upfront to reduce their mortgage interest rate. The IRS allows deductions for points under specific conditions outlined in IRS Publication 936. To qualify, the points must be linked to purchasing or improving a primary residence, and the loan must be secured by that home. The points must also be a percentage of the loan amount and itemized on the closing statement.

For taxpayers to claim this deduction, the points must be paid directly at closing or separately—not financed through the loan. Proper documentation and adherence to IRS rules are essential to ensure eligibility.

Mortgage Points vs Other Charges

Homebuyers encounter various charges during the mortgage process, but not all have the same financial or tax implications. Mortgage points stand out for their potential deductibility, unlike origination fees or mortgage insurance premiums.

Origination fees, charged by lenders for processing the loan, are not tax-deductible. These fees, typically calculated as a percentage of the loan, are outlined in the Loan Estimate and Closing Disclosure documents. Borrowers should review these carefully to identify and potentially negotiate such costs.

Mortgage insurance premiums, required for loans with less than a 20% down payment, differ from points as they are not interest-related. While generally not deductible, some private mortgage insurance (PMI) premiums may qualify for deductions under certain IRS income limitations.

Deducting Points on a New Purchase

To deduct mortgage points on a new home purchase, specific IRS conditions must be met. Points can be deducted in the year they are paid if the home is the taxpayer’s primary residence and the payment of points is customary in the area. The points must not exceed typical charges in the region, and they must be paid directly by the buyer—not rolled into the loan.

Points must also appear as a line item on the closing statement to confirm direct payment. If these criteria are satisfied, taxpayers can benefit from significant tax relief.

Points in a Refinance Scenario

When refinancing a mortgage, the rules for deducting points differ. Points paid during refinancing are usually amortized over the loan’s life. For instance, points on a 30-year refinance are deducted incrementally over 30 years, aligning with the loan’s interest expense period.

An exception exists if refinance proceeds are used for property improvements. Points associated with the improvement portion can be deducted immediately. Accurate records are crucial for compliance with IRS rules and to maximize deductions.

Reporting Methods

Accurately reporting mortgage points on tax returns is essential for claiming deductions. Taxpayers must itemize deductions using Schedule A (Form 1040), which covers mortgage interest and points. The amount in Box 6 of Form 1098 should match the points claimed on Schedule A. Reviewing the closing statement and Form 1098 ensures consistency, as discrepancies could trigger IRS scrutiny.

For those amortizing points from a refinance, the annual deduction is calculated based on the loan term. For example, $3,000 in points on a 30-year loan equates to a $100 annual deduction. This amount is added to other deductible mortgage interest and reported accordingly. Tax software or professional preparers can help ensure accurate calculations and compliance.