Do your taxes online, for free: H&R Block allows you to work on your return for free, until you file. Work on your federal, state, and small business taxes, and pay nothing until you are satisfied with your return. Start now.
Avoid costly mistakes, and take advantage of all possible credits and deductions. (Claiming deductions is really easy with H&R Block).
Refinancing generally means you'll have a higher tax bill than usual, because of your new low interest rate and smaller monthly payments. But that probably won't be the only difference.
Depending on the type of refinancing plan you used, you may qualify for other deductions as well.
Deducting the points from a rate-and-term refinance
If your new mortgage is for the same principal amount as the old one (called a rate-and-term refinance, because those are the only things altered), you'll be able to deduct part of any points you paid to secure the loan. But unlike points paid on a first mortgage, they won't be fully deductible this year.
Don't worry: you will get to deduct them. Just not all at once.
Any points paid on a refinance must be deducted over the life of the new loan. If you end up selling your home or refinancing again before you've deducted all the points you paid, you can deduct the balance at that time.
Likewise, if this refinance is not your first, you will be able to claim any previously undeducted points from the prior refinanced loan this year.
That is, unless you're refinancing with the same lender, in which case any remaining undeducted points must be re-spread over the life of the new loan (whew!).
In order to insure that you calculate your home loan interest deduction correctly, file your return electronically and have H&R Block perform all calculations and error checking for you. Working on your return is free, so why not try it now?
Deducting the points from a cash out refinance
If you took cash out when you refinanced (this is called "cash-out" refinancing) things can get even trickier. How you used the equity you extracted decides what your deduction will look like.
If you used all or part of the funds for home improvement (this is called home acquisition debt), you'll be able to deduct a larger amount of the points this year.
How much you'll be able to deduct is decided by what proportion of your new mortgage was used for home improvement.
Let's say you refinanced your original mortgage of $80,000 into a new 15-year loan of $100,000, and you paid two points, or $2,000 to secure the loan. You use the extra $20,000 to build a new home office.
$20,000 is 1/5 of $100,000, so you'll be able to deduct 1/5 of the points that you paid this year. 1/5 of $2,000 is $400. So $400 plus $107, or $507, is this year's point deduction.
(We got the $107 by taking the remaining point value, $1600, and dividing it by 15, the number of years in the loan.) You'll be able to deduct $107 worth of your points every year (including this one) until you pay off the loan (or sell or refinance).
If you use the extra cash for something other than home improvement, the math isn't as hard. The extra cash is called home equity debt, and points paid on equity debt always have to be deducted over the life of the loan.
All the interest on home acquisition debt (this means your mortgage plus cash out for home improvements) is deductible up to a total loan limit of $1,000,000.
All the interest on home equity debt (this means only the cash taken out, not the mortgage amount) is deductible up to $100,000. But you can't deduct the interest on any home equity debt that puts the total lien (mortgage plus equity loan) over the fair market value of your home.
You can get more information about the home mortgage interest tax deduction directly from the IRS, in the form of IRS Publication 936 (it's lots of fun.)
If you file a paper tax return, you will need to attach Schedule A with your return. If you e-file, any mortgage interest tax deductions will be calculated and the mortgage interest tax deduction form will be completed for you.
Note: you will need an Adobe Acrobat Reader to view these publications, which you can get here. (But you probably already have it.)
Filing your taxes is easy
Use H&R Block this year, and you are guaranteed the biggest refund, the most accurate return, and the piece of mind of knowing that the IRS has received your filing.
Choose from the free program for simple returns, to the deluxe and premier products for those filing a full 1040 with schedules C/D and other forms.
You can have your return reviewed by a tax pro, too!