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Can I deduct mortgage interest?

Dear Dollar Diva,
I'm a first time homeowner. Can I claim my mortgage interest and closing points as itemized deductions?

Congratulations on owning a piece of the American Dream! Interest and closing points are deductible on Form 1040 Schedule A, Itemized Deductions. However, new homeowners sometimes don't get the benefit of deducting interest, points and real estate taxes the first year because their total itemized deductions are less than the standard deduction for their filing status.

For those over 65 or blind, the standard deduction is higher and can be determined by using the worksheet in Internal Revenue Service Publication 501, Exemptions, Standard Deduction and Filing Information.

1999 Standard deduction
Married filing jointly; qualifying widow(er) $ 7,200
Head of Household $ 6,350
Single $ 4,300
Married Filing Separately $ 3,600

Real estate taxes
For most people, deducting real estate taxes is a piece of cake: The mortgage company sends a Form 1098 reporting the real estate taxes it paid for you. If you're lucky enough some day to have no mortgage and you write a check to pay the taxes, you'll still be able to deduct them. You simply slap the number on line 6 of Schedule A, Itemized Deductions, and it's done. That's not so for the first-time home buyer.

The Diva is going to assume your home was bought May 1, 1999, and you or your mortgage company paid $3,000 in 1999 real estate taxes that December. Taxes are for a 12-month period, but you only lived in the house for nine -- what do you do?

Look at the closing statement. There will be a line showing real estate taxes prorated from Jan. 1, 1999 through April 30, 1999 -- the four months that the seller lived in the house. The amount will be around $1,000, or one-third of the total tax bill because four months is one-third of the tax year. The seller gets to deduct this amount on his tax return, so you the buyer cannot. The $3,000 you paid has to be adjusted down by the $1,000 you received credit for at the closing, reducing your real estate tax deduction to $2,000.

Remember, if you can't itemize this year because you don't have enough deductions, there's always next year. But before you give up, read Bankrate.com's "Don't give the IRS more than it deserves" to make sure you haven't missed anything. The Diva wants you to get everything that's coming to you.

Bankrate.com's corrections policy-- Posted: March 27, 2000
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