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Are points still deductible under new tax rules?
By Jeff Lazerson
What I think: Whether your 2017 federal tax returns are filed or you are filing for an extension, it’s none too soon to get in front of the revised tax points starting with the filing of your 2018 tax returns once we hit 2019.
Let’s get right to the point. Are loan origination and loan discount points that you pay to buy your interest rate down on a home purchase or refinance still tax deductible?
Before answering, first let’s understand what a point is. One point is one percent of the loan amount. For example, one point on a $750,000 loan amount would be equivalent to $7,500.
Paying points up front is akin to paying interest in advance. With a fixed rate in mind, paying each point buys you about a 0.25 percent reduced interest rate. A 30-year fixed is currently 4.25 percent with zero points. Paying one point will fetch you a rate of 4 percent. For a 15-year mortgage, paying a point might fetch you a 0.375 percent rate reduction.
“Points are deductible, limited to the first $750,000 loan amount. If it’s a refinance, you have to deduct the points over the life of the loan,” said Marcelo Sroka, CPA at Irvine-based Sroka & Co. CPA’s. “They must also be usual and customary.”
Because the so-called standard deduction has changed under the new tax code, we actually need to go much deeper in analyzing the potential for deductibility.
According to Sroka, the old standard tax deduction for a single person was $6,350. Today it’s $12,000. For a married couple filing jointly, the former deduction was $12,700. The new is $24,000.
In order to receive tax benefits of points and the like, your total deductions have to exceed today’s standard deduction. In that case you’d use your “Schedule A” itemized deduction form.
What else is deductible?
Medical expenses are deductible if they exceed 7.5 percent of your adjusted gross income. State taxes and property taxes are deductible but capped at $10,000. Charitable contributions and mortgage interest up to $1 million (for acquisition or improvement loans issued prior to last Dec. 15).
Let’s say you and your jointly filing spouse had a $500,000 existing mortgage at a 4 percent rate that provided about $20,000 in deductible interest. And, you had another $9,000 of state and property tax deductions.
In this case, you gain by itemizing because your $29,000 of interest and tax deductions exceed the new standard deduction of $24,000.
And, then you paid one point ($5,000) to refinance into a 15-year mortgage. You can add one-fifteenth or $333 each year to your itemized deductions.
Conversely, if you had few deductions and you buy your first home toward the end of the calendar year, and you paid a point on your $500,000 loan, you would get the benefit of the lower interest rate, but no deductions apart from your standard deduction of $24,000.
These are complicated points. Always consult your tax advisor to find the highest and best tax benefits for you and yours.
If you have questions or comments, please contact Jeff Lazerson by clicking here. For more great insight make sure to check out Jeff Lazerson’s Mortgage Grader Radio Show on Sundays at 10 am on AM830 KLAA.
Jeff Lazerson - Mortgage Columnist since 2011