What is the Form 1098?

At tax time, if you have a mortgage loan on your home you should expect to receive a Form ( Statement) from your lender. The Form reports the amount of interest you paid throughout the year. You aren’t required to file this form with your taxes, because a copy will automatically be sent to the IRS by the bank. You do need to ensure that the amount you claim in mortgage interest deduction on 1040 matches what is stated on the Form 1098. It’s possible that you may be limited in what you can deduct. You should keep your copy of the Form 1098 with the rest of your records for three years after you file your return.

Mortgage Interest Deduction Limitations

There is a limit on the amount of mortgage interest you can deduct annually on your tax return. These limitations are related to how the mortgage loan is used – whether or not it’s used to purchase or construct a residence. Loans used to obtain a home are called “Home acquisition debt”, while those used for other purposes are called “home equity debt”. No matter which type of loan you use, and whether it’s backed by your first or second home, all are subject to these limitations.

Home Acquisition Debt

If you want to deduct full home acquisition debt interest, the total amount of the loan must be less than $1,000,000 on either your primary or secondary home. If you have a loan that is used to purchase, build, or improve a home, you have created home acquisition debt. Those who file tax returns using the married filing separately status are subject to a reduced limit of $500,000.

Home Equity Debt

Home equity debt is obtained through a loan that is not used to build, acquire or significantly upgrade a home. It can also apply to loans that exceed the home acquisition debt limit but are used to improve a home significantly. You can only deduct interest on loans up to $100,000. For married couples who file separately the home equity debt limit is lowered to $50,000.