1) If you itemize and deduct interest/taxes, you can only deduct portion NOT paid via 1098-MA amount. Restated - If you only paid half the mortgage, you only take half the deduction.
2) Although it is not taxable income, the amount may be used in figuring support/income for certain tax benefits - like other untaxed income is.
The 1098-MA should list the TOTAL amount of mortgage payments made for the year in Box 1, followed by the amount of that total that was paid in the form of mortgage assistance in Box 2 and the amount of that total that was paid by you in Box 3, unless you live in California where my 1098-MA had a blank Box 3 with the notation that "California does not accept or collect homeowner payments in connection with its programs." (it must violate some privacy law in California and don't even get me started on privacy laws). Anyway, if you live in California, you should just be able to subtract the amount in Box 2 from the amount in Box 1 to get your Box 3 total, although if there is a way you can go back and actually verify that this is the amount you actually paid in mortgage payments last year, it would be a good idea since the amount in my Box 1 was incorrect since I had subsequently received a corrected 1098 form and the amounts that were listed in my 1098-MA form Box 1 and 2 were based upon my original 1098. I have not received a corrected 1098-MA.
OK, so that being said, here is the gist of it: the "safe harbor" method. Say your monthly mortgage is $1,000 /month of which $300 is principle, $600 is interest and $100 goes into an escrow account for your real estate taxes and also say you aren't paying mortgage insurance. You received six months worth of mortgage assistance last year, so you receive a 1098-MA that has $12,000 in Box 1, $6,000 in Box 2, and $6,000 in Box 3. In reality, you made 6 mortgage payments last year, and of these 6 payments, a total of $3,600 ($600x6) was what you paid in interest. However, the safe harbor method allows you to claim your TOTAL mortgage payments for the year which were $6,000 because it is less than the TOTAL of the sum of your 1098 Box 1 - $7,200 ($600x12), Box 4 (0 - assuming you didn't pay any mortgage insurance) and Box 5 - $1,200 ($100x12) which totals $8,400.
Now say you were making the same payments as above but you only received three months of mortgage assistance last year. You wouldn't be able to use the safe harbor method because your TOTAL payments would not be less than the amounts in Boxes 1, 4, and 5 of your 1098. Your 1098 would still have a total of $8,400 from the sum of Boxes 1, 4 and 5, however, your TOTAL mortgage payments during the year would equal $9,000 ($1,000 x 9). Therefore, you would need to show the interest that you actually paid during those 9 months of payments you made which would equal $5,400 (9 x $600).
I have no idea how you would be able to make these computations without having a breakdown of each monthly payment made last year to reflect principle, interest and escrow (assuming you have an escrow account). I can log on to my lender's website and pull up my payment history which shows this information so if you cannot do that, you will need to request it from your lender.
You can use a special method to compute your deduction for mortgage interest and real estate taxes on your main home if you meet the following two conditions.
You received assistance under:
A: State Housing Finance Agency (State HFA) Hardest Hit Fund program in which program payments could be used to pay mortgage interest,
B: Emergency Homeowners' Loan Program administered by the Department of Housing and Urban Development (HUD) or a state.
You meet the rules to deduct all of the mortgage interest on your loan and all of the real estate taxes on your main home.
If you meet these tests, then you can deduct all of the payments you actually made during the year to your mortgage servicer, the State HFA, or HUD on the home mortgage (including the amount shown on box 3 of Form 1098-MA, Mortgage Assistance Payments), but not more than the sum of the amounts shown on Form 1098, Mortgage Interest Statement, in box 1 (mortgage interest received), box 4 (mortgage insurance premiums), and box 5 (real property taxes).
However, you are not required to use this special method to compute your deduction for mortgage interest and real estate taxes on your main home.
If we are not required to use this "special method" than what other method can we use?
Went to a Brass Tax Seminar this Last December(2013). They told US and even instilled in our Seminar Update Outline Book....in BOLD LETTERS...."Do Not use the safe-harbor in these situations! Interest Paid by Mortgage assistance payments is deductible".
BUT I'm still trying to find MORE about this 1098MA.
Do I need to figure out what the interest was for those 2 months? Should I even bother, and go back to my turbo tax and just put in zero for interest payments since it was only the two months?
Or since the interest payment says it was 3,129$, do I divide by 12 find out the interest for one month?
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