A Complete Guide to Claiming Tax Deductions via IRS Form 1098 and Its Variations

When it comes to accurate tax filing and claiming deductions, having the proper information about essential forms is crucial. Not knowing the exact deductions you can claim can set off a chain of events that may lead to an audit. IRS Form 1098 and its variations are essential for claiming deductions and filing accurately.

If you have received this form from your bank, school, or an organization you’ve donated to and are not sure what to do next, we’ve got you covered. This blog will work as your guide to what this form is, why you’ve received it, what to do next, and the best practices to follow.

What Does IRS Form 1098 Actually Mean?

Form 1098 is a reporting form that your banker, school, or organization will send to you and the IRS once you have crossed the set threshold for interest or expenses. The primary purpose of sending this form is to report certain payments that you have made to them throughout the taxation period. By law, these organizations or educational institutions are required to send you this form by January 31.

While there are several variations of this form, the most common is sent by your lender for mortgage interest tax deduction purposes. This form includes all the information about the amount you have paid, the amount paid during the time of purchase, the outstanding mortgage principal amount and more. As long as you have paid over $600 in mortgage interest in a calendar year, you are eligible for a Form 1098 deduction.

What are the Variations of Form 1098?

Although most commonly used as a mortgage interest statement, various versions of this form are sent to taxpayers for specific purposes and payments made. Some of these variations are:

• Form 1098-T: This variation of Form 1098 is commonly known as the Tuition Statement. In this, educational institutions issue a form to report all qualified tuition and related educational expenses that may qualify for a refund and for education-related eligibility benefits, such as the American Opportunity Tax Credit and the Lifetime Learning Credit. Since Tuition Statements need to be reported regardless of the amount paid, there is no minimum Dollar amount for deductions.
• Form 1098-E: This form is commonly known as the Student Loan Interest Statement. Your student loan servicer issues Form 1098-E to report on the interest you have paid on your qualified student loan. Through this form, a taxpayer can save up to $2500 by reducing their taxable income. As long as you have paid over $600 in student loan interest in a calendar year, you are eligible for Form 1098-E deductions.
• Form 1098-C: The IRS Form 1098-C is commonly known as Contributions of Motor Vehicles, Boats and Airplanes. This form applies to taxpayers who have made qualified donations to a qualified charity. The charity organization that you donated to issues this form to you so that you may claim a tax deduction for the qualified donation. The eligibility amount to receive Form 1098-C is over $500.

Step-by-Step Guide to Claiming Deductions via Form 1098 and Its Variations

Form 1098

• Confirm Your Eligibility: The first step in claiming any deductions is to check whether you’re actually eligible for them or not. Confirm if you have paid interest on mortgage payments on a qualified house.
• Collect Form 1098: Your lender must send this form by January 31. Once you have received the form, confirm all details, including the amount paid, the balance remaining, and the points paid during the purchase.
• Itemizing Everything: Once you have verified the information, it’s time to enter all the details in Form 1040. All information regarding home mortgage interest paid and points paid at purchase will be entered on Line 8a of Schedule A in Form 1040. If you have any doubts during this step, it is better to consult a real estate tax accountant.

• Attach Supporting Documents (if needed): Usually, only the Form 1098 is required for tax deductions. However, on some rare occasions, when you are filing without Form 1098, the IRS may ask for supporting documents to verify your claim.
• File Returns: The final step in claiming a tax deduction is to finalise the tax filing and to keep the records. It is recommended to keep all the forms for three years.

Form 1098-E

Find Total Interest: The first step in the process of claiming a deduction through Form 1098-E is to calculate the total interest paid. This amount should be clearly stated on the form; if you don’t receive it, you can check it in your loan servicer’s yearly interest summary.

• Check Your Eligibility: Confirm whether you’ve paid the interest on a qualified student loan, your name is on the loan, and that your income is below the IRS limit.
• Entering the Details: Once you’ve confirmed your eligibility, you can enter the details in Part II in Schedule 1 of Form 1040. Once you have filed the return, save all the records for at least 3 years.

Form 1098-T

• Checking Eligibility: You are eligible to receive Form 1098-T if you are enrolled in a postsecondary or recognized educational certification program, you’ve paid qualified expenses such as tuition, and your academic institution participates in Student Aid Programs.
• Check Correct Claiming: Ensure that you are claiming the correct amount from the correct educational credits. The American Opportunity Tax Credit offers up to $2500 per student (for the first 4 years of college), while the Lifetime Learning Credit provides 20% of expenses up to $2000, with no year limitations.
• Filing Return: Unlike prior forms, Form 1098-T uses Form 8863 (Educational Credits) for filing purposes. Once you’re done with the filing, make sure to save the records for at least 3 years.

Form 1098-C

• Check Eligibility: For Form 1098-C, ensure your vehicle is donated to a registered charity and that the charitable organization provides Form 1098-C within 30 days of the donation.
• Determine the Deduction Amount: In the case of claiming deductions via Form 1098-C, you need to determine the accurate value. You can claim the gross sale price or the fair market value, provided that the charity keeps the vehicle, materially improves it or gives it to a needy person.
• Attaching the Requisite Forms: If your claimed deduction is in the range of $500 to $5000, you need to attach Section A of Form 8283. However, if your donation is over $5000, you need to attach Section B of Form 8283 and the appraisal.
• Itemize the Deductions: Once you have attached the necessary forms, you can proceed with the final itemization for deductions. To go ahead with that, you need to add the deductions in Section A (Charitable Contributions) of Form 1040.

Best Practices to Follow While Claiming Tax Deduction via Form 1098

• Keep all the forms, records and statements safely for at least 3 years.
• Ensure that all the details in IRS Form 1098 are correct. Check the amounts, names and dates.
• Using the correct variation of Form 1098. If there is any confusion, search for a “tax preparation service near me” and consult them.
• Consult a real estate tax preparation service if there are multiple Form 1098s or a complex tax situation, like rental property or partial deductions.
• Make sure you are using the correct Form 1098 variation. Use 1098 for mortgage, 1098-T for tuition statement, 1098-E for student loan statement, and 1098-C for contributions of motor vehicles, boats and airplanes.
• Be aware of the threshold amounts and eligibility criteria for deductions.

Conclusion

When it comes to something as crucial as your taxes, having accurate information and clarity is paramount. At first glance, the IRS Form 1098 and its variations may seem tricky. However, with proper guidance from a real estate CPA, maximizing your tax deductions can be made easy.

If you are looking for a tax specialist who can help you achieve financial peace of mind, check out GavTax Advisory Services.

FAQs

Q. What should I do if I don’t receive my Form 1098?

If you haven’t received your Form 1098 by mid-February and are eligible to receive one, contact your lender or educational institution to request a copy.

Q. What should I do if information on my Form 1098 is incorrect?

If you find that the information on your Form 1098 is incorrect, you should immediately contact the lender/school/charitable organization and request a corrected form. Filing a form with incorrect information may delay processing or even trigger an audit.

Q. How long should I keep my Form 1098 and other tax records?

You should keep your Form 1098 and other tax records for at least 3 years after the filing. In case of verifications or audits, these documents will support your claim in front of the IRS.

Q. What expenses are covered as ‘Related Expenses’ in Form 1098-T?

Expenses such as fees and costs incurred during enrollment and attendance at a qualified institute are covered as related expenses on Form 1098-T. However, living expenses and transportation expenses are not covered.