Form 1098: Understanding Property Tax Deductions

As a homeowner, you may be eligible to claim a tax deduction form 1098 property tax you paid during the year. To claim this deduction, you’ll need to report the property taxes you paid on Form 1098, also known as the “Mortgage Interest Statement.” In this article, we’ll explain what Form 1098 is, who needs to receive it, and how to report the information on your tax return.

What is Form 1098?

Form 1098 is a tax form that reports the amount of mortgage interest and property taxes paid by a homeowner during the tax year.

Who Needs to Receive Form 1098?

Form 1098 must be sent to any homeowner who paid at least $600 in mortgage interest or property taxes during the year. This includes both primary and secondary residence. If you paid less than $600 in interest or taxes, the lender or servicer is not required to send you a Form 1098, but they may choose to do so voluntarily.

How to Report Form 1098 Information on Your Tax Return?

When preparing your tax return, you’ll need to report the information from Form 1098 on Schedule A, which is used for itemizing deductions. On Schedule A, you’ll find a section for reporting mortgage interest and property taxes. You’ll need to enter the total mortgage interest and property taxes paid during the year, as reported on Form 1098.

You can also use form 1098 to claim mortgage interest credit if you qualify for the criteria. This credit is available to certain lower-income taxpayers with mortgage interest expenses and meets certain other requirements.

In addition to the information outlined above, there are a few other things you should know about Form 1098 and property tax deductions:

  • State and local property taxes are generally fully deductible as long as they are based on the property’s value and are not considered a payment for a service. You can deduct the full property taxes on your federal income tax return.
  • Mortgage interest deductions are subject to a cap. For tax years 2018 through 2025, the cap is limited to $750,000 of mortgage debt for a married couple filing jointly and $375,000 for single taxpayers and married couples filing separately.
  • Points paid on a mortgage also qualify as mortgage interest and can be reported on Form 1098. Points are prepaid interest that you pay when you take out a mortgage. Lenders often require them as part of the mortgage loan process.
  • If you refinance your mortgage, you can also claim a deduction for points paid on the new loan. However, the points must be prorated over the life of the loan to claim the deduction.
  • If you purchased your home during the tax year, you can only claim a deduction for the property taxes you paid and allocated to the tax year. Any property taxes included in the purchase price or paid by the seller will not be deductible from you.
  • You can also deduct property taxes paid to foreign countries, which are subject to limitations on foreign taxes.

It’s important to note that certain restrictions, limitations, and phases of deductions may apply, and it’s advisable to consult a tax professional for more detailed and personalized advice.

  • In summary, as a homeowner, you can claim a significant tax deduction for the property taxes you paid during the year by reporting the information on Form 1098. Understanding the form, and knowing how to report the information on your tax return, can help you to take advantage of this valuable tax benefit.

Another thing to remember regarding property tax deductions is the impact of the Tax Cuts and Jobs Act (TCJA), passed in 2017. The TCJA introduced a new limitation on state and local tax (SALT) deductions.

Before the TCJA, homeowners could deduct the full amount of their state and local income, sales and property taxes. However, the new law capped the SALT deductions at $10,000 per tax return. This means that if your total state and local income, sales, and property taxes exceed $10,000, you’ll only be able to deduct up to $10,000 on your federal tax return.

This cap applies to all taxpayers, regardless of whether they itemize or take the standard deduction. This could limit the tax benefit for those living in high-tax states or with higher property taxes.

  • Another impact of the TCJA that can affect property tax deductions is the increase in the standard deduction. The standard deduction almost doubled for all filing statuses, which means that more people may choose to take the standard deduction instead of itemizing their deductions. Taking the standard deduction eliminates the ability to deduct specific itemized deductions, including the property tax deduction.

In conclusion

Claiming a property tax deduction on your federal income tax return can reduce your tax liability as a homeowner. By understanding Form 1098, reporting the information correctly, and being aware of the impact of the TCJA, you can take advantage of this valuable tax benefit and ensure you’re getting all the deductions.

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