It’s tax season and you are looking for ways to lower your tax bill. Here’s a key tax tip. Make sure to remember to deduct old refinancing points for a windfall. 

You would have to be living under a rock not to realize the housing market looks like one of those bombed out cities after World War II. It’s been an ugly four years and that ain’t no lie! They powers that be tell us it is getting better. Maybe that is true. Maybe it isn’t. We shall see. When it comes to key tax deductions, however, your house could provide a key one you might not realize. 

What is the tax benefit of a mortgage? Let’s all mindlessly chant: “You can deduct the mortgage interests…” Yes, this is undoubtedly true, but fewer people seem to realize there is a second deduction as well. Many mortgages require the payment of points during the origination period. If you refinanced your home in the past tax year, you may be in for a big windfall. 

The points on a mortgage must be deducted over the life of the loan. On a 30 year note, this means you can only deduct one-thirtieth of the points each year. If you paid $5,000 in points, this means you would be able to claim a deduction of only $166 a year. Nice, but nothing to get too excited about. 

Okay, here is where the trick comes in. 

What if you refinance that loan? What happens to the points? You get to deduct all the remaining years…this year! That’s huge. Consider our example above. Let’s say we refinance after year 5 of the loan. We would be able to claim a deduction of 25/30ths of the points paid. This would equate to roughly $4,160. Ah, now I have your attention! 

The key to this deduction is being able to prove it. Simply put, you need to have documentation and KEEP IT. The documents should show the original points paid and the refinance that allowed you to “fast forward” them. Other than that, you should be home free.