IRS Form 1098: How to Maximize Your Mortgage Interest Deduction

For many Texas homeowners, buying a home isn’t just about achieving the American dream — it’s also about making smart financial moves. One of the biggest financial benefits of homeownership is the ability to deduct mortgage interest, which can translate to thousands of dollars in tax savings each year. With higher mortgage rates in 2025 and housing costs that have climbed across Texas — from Austin to Houston, Dallas to San Antonio — it’s more important than ever to understand how IRS Form 1098 helps you unlock these savings. This guide will walk you through everything you need to know about Form 1098, how mortgage interest deductions work, and strategies to ensure you maximize your tax benefits this year. 

What Is IRS Form 1098 — The Mortgage Interest Statement?

IRS Form 1098 is a critical document that reports the amount of mortgage interest and related charges you paid during the tax year. If you paid $600 or more in interest, your lender is required to send you this form. It will detail not just mortgage interest but also any points paid, overpaid interest refunded, and in some cases, property taxes paid via escrow. Texas homeowners will typically receive their Form 1098 by the end of January each year — so keep an eye on your mailbox or your lender’s online portal.

How to Read Form 1098

Understanding what’s on your Form 1098 can help you ensure you’re claiming every deduction you’re entitled to. Common boxes include:

• Box 1: Total mortgage interest paid
• Box 2: Outstanding mortgage principal
• Box 5: Mortgage insurance premiums (if applicable)
• Box 6: Points paid on the purchase of the principal residence
• Box 10: Property taxes paid through escrow

Review each box carefully, and match the amounts to your records.

What to Do If Your Form 1098 Has Errors

Mistakes on Form 1098 aren’t common, but they do happen. If you notice a discrepancy:

• Contact your lender immediately and request a corrected form.
• Keep detailed records of your communication.
• If a corrected form isn’t issued before filing, report what you believe to be accurate and include an explanation with your tax return.

How Form 1098 Interacts With Other Tax Documents

Form 1098 is often part of a larger tax picture. For example:

• Combine Form 1098 amounts with property tax statements to maximize deductions.
• Ensure consistency between your Form 1098 and any Form 1099 you might receive (e.g., for mortgage debt forgiveness).
• Cross-check with W-2 statements to coordinate withholding and deduction strategies.

Special Cases: Divorce, Co-Ownership, and Estate Transfers

If you co-own a home, are divorced, or inherited property, mortgage interest deductions can get complicated:

• Co-ownership: Each owner can deduct interest they personally paid.
• Divorce: Only the person responsible for the mortgage (or who paid the interest) can claim the deduction.
• Estate transfers: The estate may be able to deduct interest paid before transfer; afterward, the new owner can deduct eligible interest they pay.

How Mortgage Interest Deductions Work — Save More With Today’s Mortgage Rates

Mortgage interest deductions reduce your taxable income, lowering your overall tax bill. You can deduct interest paid on your primary residence, a second home, and qualifying home equity loans or lines of credit — as long as the combined mortgage debt doesn’t exceed IRS limits. For mortgages originated on or after December 16, 2017, interest on up to $750,000 of qualified debt (or $375,000 if married filing separately) is deductible. If your loans originated before that date, the limit is $1 million (or $500,000 if married filing separately).

Example: Houston Family Tax Savings

Imagine a family in Houston with a $500,000 mortgage on their primary residence (originated in 2019) and a $200,000 mortgage on a Galveston beach house. Their combined debt of $700,000 qualifies for full interest deduction under current IRS rules. If they paid $35,000 in mortgage interest in 2025, that entire amount can reduce their taxable income — potentially saving them $7,000 or more, depending on their tax bracket.

Additional Example: Austin First-Time Buyers

Consider first-time buyers in Austin who purchased a $450,000 condo in early 2025 with a 7% fixed rate. They paid $31,500 in interest in the first year. Thanks to the mortgage interest deduction, they can reduce their taxable income significantly, helping offset higher monthly payments due to current interest rates.

Discount Points, Prepaid Interest, and How to Deduct Them

If you paid discount points to lower your mortgage rate — a common strategy among Texas borrowers during refinancing — you can deduct these points either in full the year they were paid (if specific IRS criteria are met) or over the life of the loan. Prepaid interest follows similar rules and will be clearly noted on your Form 1098. Be sure to include these amounts when calculating your deductions.

How to Deduct Interest on Home Equity Loans and HELOCs

The IRS allows deductions for home equity loan and HELOC interest only if the borrowed funds were used to buy, build, or substantially improve your home. For example, if you took out a $50,000 HELOC to add a new bedroom or renovate your kitchen in Austin, the interest may be deductible. But if you used those funds to pay off personal debt or fund a vacation, the interest is not eligible.

Refinancing? Don’t Miss These Deduction Tips

Many Texas homeowners have refinanced in recent years to take advantage of rate dips. If you refinanced in 2025, you’ll receive a Form 1098 from both your original and new lenders. Remember to include both sets of interest payments in your tax return. Also, points paid on a refinance are generally deducted over the life of the loan — unless the refinance was used to improve your primary home.

Example: Dallas Couple’s Refinancing Journey

Consider a Dallas couple who refinanced their $400,000 mortgage in mid-2025. They paid $2,500 in points at closing and $18,000 in interest split between the old and new loans. On their tax return, they’ll deduct the full $18,000 interest and either deduct the $2,500 in points over the life of the loan or — if the refinance funded home improvements — all at once.

Common Mistakes Texas Homeowners Make With Form 1098

• Overlooking partial-year deductions. If you sold or refinanced during the year, don’t miss out on interest paid before the transaction.
• Forgetting to combine Form 1098s. Include interest from all lenders who held your loan during the year.
• Incorrectly deducting home equity loan interest. Be sure the loan proceeds were used on the home.
• Missing deductions for discount points. Some borrowers mistakenly skip these or forget to spread them out over the loan term when required.

Advanced Tax Planning Strategies for Texas Homeowners

If you expect higher income in future years, consider prepaying mortgage interest before year-end to increase current deductions. Similarly, bundling mortgage interest with other deductions like large charitable gifts or significant medical expenses could help you exceed the standard deduction and make itemizing worthwhile. Texas homeowners should also review how mortgage interest interacts with state property tax deductions and whether a refinance at a higher rate could produce greater tax savings even if payments rise.

FAQs on Form 1098 and Mortgage Interest Deductions

Do I need Form 1098 to claim the mortgage interest deduction?
Technically no, but it provides clear documentation and simplifies reporting.

Can I deduct mortgage interest on my Texas vacation home?
Yes, as long as your total qualified mortgage debt is within the IRS limits.

Are property taxes included on Form 1098?
If your lender pays them through escrow, yes — but property tax deductions are claimed separately.

What if I didn’t receive Form 1098?
Contact your lender. You’re still responsible for accurately reporting mortgage interest.

How do I handle mortgage interest deductions if I co-own a property?
Each co-owner can generally deduct the mortgage interest they personally paid. Be sure to document payments clearly.

Final Thoughts: Make the Most of Your Mortgage Deduction

Homeownership brings valuable tax perks — but only if you claim them correctly. Texas homeowners, with rising property values and competitive mortgage markets, can save significantly through mortgage interest deductions. Take the time to review your Form 1098, work with a tax professional if needed, and ensure you’re capturing every eligible dollar. Have questions?  Give us a call at 512.881.5099 or get in touch with me by completing this quick form, and I'll be in touch as soon as possible.

Please note that this information should not be construed as tax advice.