DEFINITION of 'Form 1098'

Form 1098 is a form filed with the Internal Revenue Service (IRS) that details the amount of interest and mortgage-related expenses paid on a mortgage during the tax year. These expenses can be used as deductions on a U.S. income tax form, Schedule A, which reduces taxable income and the overall amount owed to the IRS.

Form 1098 is used to report interest payments made by an individual or sole proprietor to the government for tax purposes. The form is also reported to the borrower who can use the information to deduct the interest paid from his or her taxable income.

BREAKING DOWN 'Form 1098'

A mortgage is a loan taken out to purchase and secure a home. The borrower usually is mandated to make monthly payments to the lender; monthly payments typically include the principal and the interest on the loan. The interest payments made on a mortgage can be claimed as a tax deduction on the borrower’s federal income tax return on a form called Mortgage Interest Statement – Form 1098. A tax deduction helps to reduce the taxable income of a taxpayer. For example, a single taxpayer who earned $65,000 in a given tax year and qualifies for a $5,000 tax deduction would be effectively taxed on $65,000 - $5,000 = $60,000, instead of $65,000.

The standard Form 1098, Mortgage Interest Statement, reports how much an individual or sole proprietor paid in mortgage interest during the tax year. The mortgage lender is required by the Internal Revenue Service (IRS) to provide this form to borrowers if the property that secures the mortgage is considered real property. Real property is defined as land and anything that is built on, grown on, or attached to the land. The home for which the mortgage interest payments are made have to be qualified by IRS standards. A home is defined as a space that has basic living amenities including cooking facilities, bathroom, and sleeping area. Examples of a home include a house, condominium, mobile home, yacht, co-operative, rancher, and boat. Also, qualified mortgages, according to the IRS, include first and second mortgages, home equity loans, and refinanced mortgages.

Although the lender may provide Form 1098 to all real property mortgage owners, only mortgage holders that paid at least $600 in interest payments qualify for the tax deduction. An individual or sole proprietor with more than one mortgage will receive multiple 1098 forms from his or her lending institution that show the total interest paid for each real property. Form 1098 is filed separately for each mortgage owned with less than $600 in interest payments. This means that even though the homeowner makes more than $600 in total interest on multiple mortgages owned, Form 1098 will not be filed for any interest payment below $600 made on a single mortgage. For example, an individual with two homes who pays $550 interest on one and $1,250 interest on the other will have paid in total $1,800 interest. However, Form 1098 will only be filed to report the interest payment made on the second home. The $550 interest made on the first home can still be filed using the form, but this is optional. Interest payments made by a trust, estate, corporation, or partnership do not need to filed.

A taxpayer who deducts mortgage interest payments has to itemize his or deductions. The total amount of mortgage interest paid in a year can be deducted on Schedule A. Itemized deductions are only beneficial if their total value of the itemized expenses falls below the standard deduction. A homeowner whose itemized deduction including mortgage interest payments equals $5,500 may be better off going for his standard deduction of $6,350 instead, since the IRS only allows a taxpayer to opt for one method.

A mortgage owner is also able to deduct points paid on the purchase of a real property. Points refer to interest paid in advance or simply pre-paid interest made on a home loan to improve the rate on the mortgage offered by the lending institution. However, the fact that points are reported on Form 1098 does not necessarily mean that the borrower qualifies for the deduction.

Versions of Form 1098

Form 1098 is one of four forms with the number 1098 on it. The three other versions of 1098 include:

1. 1098-C: Details the donations of automobiles, boats and airplanes to charitable organizations, which give the vehicles to the needy or sell them at below-market price. Form 1098-C is filed and reported by the charitable organization and includes the date of donation, type of vehicle, vehicle identification number (VIN), and value of vehicle.

2. 1098-E: Reports the interest paid on qualified student loans during the tax year. The interest paid can be deducted by the taxpayer who will receive a Form 1098-E detailing how much interest was paid that year. The form is sent by the lending institution if at least $600 was paid in interest, although the taxpayer may still get a form if s/he paid less than $600.

3. 1098-T: Provides information about post-secondary tuition and related fees during the year. Form 1098-T is filed by the school and can be used to calculate education-related tax deductions and credits such as the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC). The form also reports any scholarships and grants received through the school that may reduce the taxpayer’s allowable deduction or credit.

RELATED TERMS
  1. IRS Publication 936

    A document published by the Internal Revenue Service (IRS) that ...
  2. Mortgage Interest

    Mortgage interest is the interest paid by homeowners on the financing ...
  3. First Mortgage

    A first mortgage is the primary lien on the property that secures ...
  4. Itemized Deduction

    Itemized deductions are deductions that allow taxpayers to take ...
  5. Tax Deductible Interest

    The tax deductible interest is a borrowing expense that a taxpayer ...
  6. Form 8396 (Mortgage Interest Credit)

    Form 8396 (Mortgage Interest Credit) is an IRS tax form used ...
Related Articles
  1. Taxes

    Calculating the Mortgage Interest Tax Deduction

    The amount of money you save by paying your mortgage off quickly will far exceed any benefit from the mortgage interest tax deduction.
  2. Personal Finance

    Deducting Interest on Your Second Mortgage

    It's a little tricky, but the effort can save you thousands.
  3. Personal Finance

    Tax Reform Halves Those That Qualify for Mortgage Interest Deduction

    Owing to tax reform, the number of households that will take the mortgage interest deduction will decline by more than half.
  4. IPF - Mortgage

    Reverse Mortgages and Your Taxes

    Learn the tax benefits of a reverse mortgage. Major considerations: Are the proceeds taxable? Is the interest tax deductible? Can You Deduct Property Taxes?
  5. Taxes

    An Overview of Itemized Deductions

    Itemized deductions will mostly stay the same for 2017 tax year (medical deductions improve under the new tax bill). Big changes start in 2018.
  6. Taxes

    Creating a Tax-Deductible Canadian Mortgage

    Find out how to get a tax benefit from your mortgage like your neighbours to the south.
  7. Personal Finance

    The Benefits of a Mortgage in Low Rate Environment

    The idea of simply paying off the mortgage has become an antiquated way of thinking due to the current low interest rate environment.
  8. Personal Finance

    Ways to Be Mortgage-Free Faster

    Getting rid of this debt faster has bigger benefits than you might think.
  9. Personal Finance

    5 Reasons To Save For A Big Mortgage Down Payment

    You may be anxious to buy a home, but taking time to save a large down payment has numerous advantages.
RELATED FAQS
  1. When is mortgage insurance tax deductible?

    Homeowners who took out or refinanced a mortgage after Jan. 1, 2007, may qualify for the PMI deduction, depending on their ... Read Answer >>
  2. Why do most of my mortgage payments start out as interest?

    The first thing a first-time home buyer needs to know is that over the life of the mortgage, the portions of interest to ... Read Answer >>
Hot Definitions
  1. Quick Ratio

    The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.
  2. Leverage

    Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...
  3. Financial Risk

    Financial risk is the possibility that shareholders will lose money when investing in a company if its cash flow fails to ...
  4. Enterprise Value (EV)

    Enterprise Value (EV) is a measure of a company's total value, often used as a more comprehensive alternative to equity market ...
  5. Relative Strength Index - RSI

    Relative Strength Indicator (RSI) is a technical momentum indicator that compares the magnitude of recent gains to recent ...
  6. Dividend

    A dividend is a distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders.
Trading Center