Did you pay points in 2022 when you took out the loan?

[ahk1]

Hi

I am entering my 1098 form details in mortgage section.

I get to the part where it asks me this question-

"Did you pay points in 2022 when you took out the loan?" I see two options-

1. "We paid points when we refinanced, purchased a second home, or opened a home equity loan in 2022."

2. "We have already deducted all the points we paid in 2022, or we didn't pay any points."

Now, I did pay discount points to secure my interest rate for 6 months in 2022. But none of these options make sense. 1. looks correct except it says "second " home or  home "equity" loan. Both does not seem right.

If I choose 1 anyway, I see this "Is this 1098 the most recent for your loan?"  What would be the answer to this? Is it asking about 2023's 1098 form or 2022's 1098 form (which has details on points I paid for obvious reasons)?

Then, finally after answering other questions I get to "Your mortgage interest is being limited". I think I understand this part - since my loan is 1M, some maths is happening and letting me use portion of the interests for tax savings. I also see something called "Points not on a 1098". What is that? Website does not explain.

Interesting part is- If I dont choose any option on this question- "Did you pay points in 2022 when you took out the loan?" I am getting a bigger tax refund. None of this is making sense to me.

I also would like to know how these points are going to be used. I took loan in 2022 so how can I use those points for some tax benefit now? I did try to use Itemized deduction last year but it did not come close to standard deduction so did not use it.

P.S. This is my first and primary house.

[LindaS5247]

Please clarify your question by providing additional information.  Did you deduct points in 2022?  Does your 2023 Form 1098 show points? Are you itemizing this year?

[ahk1]

No, i did not use itemized deduction for 2022 taxes as it was coming up less than the standard deduction.

My 2023’s 1098 does not show loan points i paid in 2022. My 2022’s 1098 show the loan points in box 6.

yes i am going to do itemized deduction this year as it is coming up more than the standard deduction.

[KrisD15 · Accepted solution]

The tax law is this:

When points are charged on a loan, the amount charged as points is considered "Pre-paid Interest".

If it is an "original loan" the TOTAL amount of points paid can be claimed, in addition to the year's worth of interest, as a deduction (subject to Itemizing) the year the loan is made.

If it is a HELOC or refinanced loan, the amount of the points need to be amortized (spread out) over the life of the loan. 

If you had you entered the 2022 Form 1098 with the points reported, the program would have added the total of the points as interest.

You did not Itemize, therefore you did not claim the interest or the total points. 

HOWEVER-

According to the IRS:

"Deduction Allowed in Year Paid
You can fully deduct points in the year paid if you meet all the following tests. (You can use Figure B as a quick guide to see whether your points are fully deductible in the year paid.)

1. Your loan is secured by your main home. (Your main home is the one you ordinarily live in most of the time.)
2. Paying points is an established business practice in the area where the loan was made.
3. The points paid weren't more than the points generally charged in that area.
4. You use the cash method of accounting. This means you report income in the year you receive it and deduct expenses in the year you pay them. Most individuals use this method.
5. The points weren't paid in place of amounts that are ordinarily stated separately on the settlement statement, such as appraisal fees, inspection fees, title fees, attorney fees, and property taxes.
6. The funds you provided at or before closing, plus any points the seller paid, were at least as much as the points charged. The funds you provided aren't required to have been applied to the points. They can include a down payment, an escrow deposit, earnest money, and other funds you paid at or before closing for any purpose. You can't have borrowed these funds from your lender or mortgage broker.
7. You use your loan to buy or build your main home.
8. The points were figured as a percentage of the principal amount of the mortgage.
9. The amount is clearly shown on the settlement statement (such as the Settlement Statement, Form HUD-1) as points charged for the mortgage. The points may be shown as paid from either your funds or the seller's.

Note. If you meet all of these tests, you can choose to either fully deduct the points in the year paid, or deduct them over the life of the loan."

Therefore you also have the option to claim the points over the life of the loan. 

I have not seen this option in the TurboTax software, therefore you might need to "Trick the Software" by saying Yes, it was refinanced, and yes you paid points in 2022. Enter the points paid in 2022. This will force the software to amortize the points.

BE SURE TO INDICATE THAT NO CASH WAS TAKEN OUT, that the entire loan was used to "Build, Buy, or Improve" the property.

This should result in the additional interest added to the Home Mortgage Interest Deduction.

If the interest is limited because of your loan balance, the addition of the points should still increase the deduction.

This "stretching of the truth" is not reported on your return, it is information used on the TurboTax worksheets, and suggested as a "work-around" to get the proper calculation that is reported on your 1040.

[zomboo]

In addition to KrisD15's great solution, I would like to add the following:

1. When TT asks if the 1098 is the most recent, select Yes. 'No' is for when you have more than one 1098 for the same mortgage because the lender sent you an original and a corrected 1098, or your mortgage was sold in 2023 to another lender and you have a 1098 from each.

2. The points you paid at origination in 2022 were shown on the 1098 for 2022. Starting with 2023, points will not be shown on the 1098. Now that you spreading the points paid in 2022 over the life of the loan, the amortized points paid in 2023 are 'Points Not Shown on 1098' (i.e. not shown on the 2023 1098).

3. When asked if you met all of the tests listed in KrisD15's response, don't worry about number 6. That only applied in 2022 and if you wanted to deduct all or most of the points then.

[ahk1]

Thanks!

Yes, it seems I will have to 'trick' the software because option 1) "We paid points when we refinanced, purchased a second home, or opened a home equity loan in 2022." is as close as it can get to the truth.

To reiterate, I bought 0.425 points in my loan in 2022. Loan was for financing my primary home. I did not use these points for 2022 taxes because standard deduction was higher than itemized. Now, 2023 is giving me more value with Itemized Deduction so I want to use points I paid in 2022 as well.

Please let me know if my understanding is correct.

Thanks for the help! I do understand this better now.

[zomboo]

Instead of deducting all of the points at once on your 2022 taxes, you are now spreading the points over the life of the mortgage. You can't deduct all of the points at once now. If your mortgage is for 30 years, you can deduct 1/30 of the points this year and for each year going forward until the mortgage is paid off. If you refinance the mortgage in the future, all of the remaining points will be deductible.

[zomboo]

For this year and every year going forward, check the box for 'this loan is a refinance of a previous loan'. When asked if you paid points, check yes and enter the total amount paid in 2022. Turbo Tax will use the loan origination date (2022) and the length of the loan in years (30) to calculate the deductible points for you.

[zomboo]

Hold on. I don't want to add to your confusion, but something just occurred to me. You may not have to say the loan is a refinance to get the results. Simply check the box for 'I'm spreading the points over the life of the loan'. I tried this on my return and it worked.

[zomboo]

In your original post, you said you didn't know which option to select for the question:

"Did you pay points in 2022 when you took out the loan?"

1. "We paid points when we refinanced, purchased a second home, or opened a home equity loan in 2022."

2. "We have already deducted all the points we paid in 2022, or we didn't pay any points."

If you see this question again, neither is true so don't select option 1 or 2.

I am only trying to help and I hope I am not just adding more confusion.

[ahk1]

I see those two options only. I dont see option like you mentioned:” i am spreading points…”. Are you using online software or downloaded one? I have heard differences in user experiences between the two.

if i choose neither of options, software does not let me enter points anywhere else.

i think that is why @KrisD15  said to trick the software here and bchoose 1.

[DawnC]

You have to say you spread the points in 2022 to have the option to amortize them this year.   Last year, when the loan was new, you had the option to deduct in full or amortize, and although you did neither because you did not itemize, you have to say you elected to spread them.    If you say you deducted them all, there is nothing to amortize.   But if in 2022, you elected to amortize, you get a small deduction each year.   You got no advantage out of it last year, but this year you can.   But you can't deduct all the points this year - that option was only available in 2022 when the loan was new.   Now your only option is to amortize over the life of the loan - starting in 2022.   This would be year 2 of amortization.  

[zomboo]

I am using the desktop version. Be sure to go all the way through the questions. It may be worth while to delete your current entry and start over. Delete the current 1098 entry, save and log off, maybe clear any turbo tax cookies if you can, then log back on and enter your mortgage again and see if anything changes. The solution offered by KrisD15 is okay too. Let us know what works best for you.

[ahk1]

Thank you. But as i mentioned in my question I only see two options-

1. "We paid points when we refinanced, purchased a second home, or opened a home equity loan in 2022."

2. "We have already deducted all the points we paid in 2022, or we didn't pay any points."

I dont see "spreading the points"  option.

[KrisD15]

Zomboo's idea to delete the 1098 is a good idea. 

The program hangs onto information sometimes and doesn't always show the same screens.

I believe you are using TurboTax Online

To Delete a Form  using TurboTax Online:
Select Tax Tools on the left side-bar
Select Tools from that drop-down
Select “Delete a form” on the TOOLS CENTER screen
Select the Form 1098 and delete
For TurboTax Online, you should delete any 1098 you have already entered and do not carry-over the 1098 from 2022 if the program gives you that option.

Delete Form 1098

Delete “Home Mortgage Interest Worksheet” 

Go back to 

Deductions and Credits 

Mortgage Interest and Refinancing (Form 1098) START or EDIT/ADD

Select Yes to "Did you pay home loans in 2023?" 

Select “Change how I enter my form” if needed DO NOT IMPORT THE FORM

Select “Type it in myself”

Enter name of Lender CONTINUE

Select "None of the above" for "Do any uncommon situations apply?"

CONTINUE

Enter the details off the 1098 - Box 3 should be a date in 2022 - Box 11 should be blank or the same as Box 3

CONTINUE

Select "Yes, this loan is secured by a property of mine" CONTINUE 

Select "Primary Home" for “What kind of property is this loan for?” CONTINUE

NEXT SCREEN “Did you pay points in 2022 when you took out the loan?” 

Select “I paid points when I refinanced, purchased a second home, or opened a home equity loan in 2022”

CONTINUE

NEXT SCREEN “Tell us about the points you paid in 2022” enter the DOLLAR amount and term (years) of loan

CONTINUE

“Is this 1098 the most recent for your loan?” 

YES      CONTINUE

“Let’s get some details about this loan” 

Select “This loan is neither of these”    CONTINUE

NEXT SCEEN “Congrats, you get a tax break”    CONTINUE

NEXT SCREEN   “Here’s your 1098 info” shows the yearly interest and total amount of points, (the points will be amortized later) 

CONTINUE

If the loan is over the limit, the interview will continue

Enter the balance of the loan Jan 1st of this year 2024

Leave the paid off box blank 

CONTINUE

“Do either of these apply to this loan?”    “NO”   CONTINUE

“Let’s wrap up your mortgage interest deduction” screen shows the loan balances  CONTINUE

“Your mortgage interest is being limited” this screen adjusts for the loan being over the limit. 

This screen should show the yearly interest and yearly portion of points 

CONTINUE

You can see the itemized deductions on the tax summary 

To View using TurboTax Online:
Select Tax Tools on the left side-bar
Select Tools from that drop-down
Select “View Tax Summary” on the TOOLS CENTER screen
 

@ahki