“If you fail to follow some little-known rules for calculating your home mortgage deduction, you may be writing off too much interest. Instead of saving on taxes, you could wind up owing them,” says Business Week in next week’s “Personal Finance” column.
The problem is that when you refinance, the rules change for what you can deduct as mortgage interest when it comes time to file your taxes. Normally you can deduct 100% of your interest, but if you refinance, “Only the interest on your original mortgage balance, plus an additional $100,000, qualifies for a deduction.”
Unfortunately, you won’t see any mention of this on the Form 1098 that your bank sends to you each new year, because lenders “have no incentive to educate borrowers about the tax consequences,” says the CEO of an investment firm. The IRS isn’t specifically targeting homeowners who miscalculate their taxes, but you can open yourself up for a nasty surprise if you get audited.