How can you pay thousands of dollars in mortgage payments in a year, and get a tax Form 1098 for a fraction of actual mortgage interest paid?
That’s what my client wanted to know.
His monthly mortgage payment is $2715. The loan is currently interest only. All the payments were made.
And yet, the Form 1098 from PNC says the year’s mortgage interest paid is only $1800.
So what happened to the other $30,780? That’s a lot of money to go missing.
Welcome to the further screwed up world of mortgage loan servicing.
The short answer right now to the question I posed at the top is I don’t know yet.
But here’s what I suspect.
What servicer does with your payment
I’ll bet that PNC, the servicer I love to hate, has put the monthly payments in suspense, and has not posted them to the loan.
By holding them in suspense, they don’t show up as interest paid on the mortgage.
Why the payments were put in the suspense account I don’t know.
What it takes to get them out of suspense, we’ll have to see.
Getting your taxes right
My advice to the client and his tax preparer is to claim a deduction for all of the year’s mortgage payments. It may conflict with the information provided by the servicer, but the servicer’s information doesn’t necessarily control.
If you don’t claim as large a deduction as you think you are entitled to, the IRS isn’t going to come back and urge you to correct an error that’s in their favor.
You may have to later convince the IRS that your calculation of the amount of interest you paid is correct and the servicer’s statement is wrong. A copy of the monthly mortgage statement and a escrow analysis statement are a starting point.
Consider as well whether the same problem exists in prior years and if an amended tax return is worthwhile.
Tax sleuthing
In the meantime, I’m going to read the note and deed of trust that governs how the lender is supposed to credit payments. Most security instruments set out the order in which payments are applied to amounts the borrower owes.
I’m hitting the RESPA regulations on suspense accounts and their use and misuse.
And then we’ll spring a Request for Information and a Notice of Error on the servicer.
I wonder how many other servicers will be outed when they produce palpably erroneous tax documents.
Related
Cancellation of debt and taxes
Tax deductions hidden in Chapter 13
Image of boxed money courtesy of Locomomo and Flickr
