Making payments to the trustee to catch up on the mortgage?
If you haven’t claimed a tax deduction for the plan payments that go to the lender, you’re leaving money on the table.
That’s money that fattens Uncle Sam’s coffers at the expense of your own.
You don’t really want to do that, do you?
Mortgage interest deduction
If your Chapter 13 plan is getting you current on your home mortgage, the plan is funneling a part of each month’s Chapter 13 payment to the lender.
Missed mortgage payment are largely interest, unless you are years in to a fully amortized loan. So when your Chapter 13 plan proposes to get current on the loan through payments to the Chapter 13 plan, you’re proposing to pay the interest due.
The tax benefit in homeownership revolves around the fact that mortgage interest is deductible if you itemize your deductions. Interest paid reduces the income on which you pay tax.
And, you don’t forfeit that tax benefit when you file Chapter 13.
Yet, for reasons I cannot explain, mortgage lenders seem to have gotten a pass on the reporting requirements that govern non bankruptcy payment of interest. They don’t report to the IRS and to you, the ultimate payor, the interest paid through the bankruptcy plan by means of a 1098 form.
Find the deductible interest
To claim your deduction, you’ll have to dig a bit. All Chapter 13 trustees now have websites where you can access a report about distributions made to creditors by the trustee.
You may have to figure out whether the proof of claim for the mortgage loan was filed by the original lender or by the servicer, or sometimes by the trustee of the Wall Street trust that owns the note.
Step by step instructions to calculate mortgage interest paid by the trustee
The claim usually stands out because it will include the total balance owed on the loan.
Buried in that mass of numbers will be the amount paid to the mortgage lender.
Make sure to print out the reports that show the amount. Since the IRS didn’t get a copy of a 1098 showing payment of mortgage interest from the lender, you may have to back it up from your files.
Deadline to amend back returns looms
If you’ve been in your plan for several years, think not just about the return due soon. Consider amending earlier returns to claim the deduction, and get a refund of what you overpaid in taxes.
You get three years from when you filed the tax return to amend it. The IRS has a handy, dandy fact sheet on amending returns.
Don’t leave your money on the table for Uncle Sam. Claim that deduction.
Image courtesy of Flickr and TracyO