Mortgage Interest - Recoveries of Overpaid Interest

If you receive Federal Form 1098 Mortgage Interest Statement, which includes an amount in box 4 Refund of overpaid interest (see instructions on whether to report as Other Income on Form 1040), the information below will help you determine if any of the amount in box 4 needs to be reported as income on line 8 of IRS Schedule 1 (Form 1040).

Per IRS Publication 936 Home Mortgage Interest Deduction, page 5:

Refunds of interest. If you receive a refund of interest in the same tax year you paid it, you must reduce your interest expense by the amount refunded to you. If you receive a refund of interest you deducted in an earlier year, you must generally include the refund in income in the year you receive it. However, you need to include it only up to the amount of the deduction that reduced your tax in the earlier year. This is true whether the interest overcharge was refunded to you or was used to reduce the outstanding principal on your mortgage. If you need to include the refund in income, report it on Schedule 1 (Form 1040 or 1040-SR), line 8.

If you received a refund of interest you overpaid in an earlier year, you will generally receive a Form 1098, Mortgage Interest Statement, showing the refund in box 4. For information about Form 1098, see Form 1098, Mortgage Interest Statement, later.

For more information on how to treat refunds of interest deducted in earlier years, see Recoveries in Pub. 525, Taxable and Nontaxable Income.

The Recoveries section starting on page 23 of IRS Publication 525 Taxable and Nontaxable Income, provides instructions on how to figure the amount to include in income, if applicable. The section Itemized Deduction Recoveries starting on page 23 of the publication specifically addresses how to determine the amount to include in your income from a recovery of an amount deducted in an earlier year as an itemized deduction. 

Worksheet 2. Recoveries of Itemized Deductions on page 26 of IRS Publication 525 will help calculate the part of a recovery amount to include in your income in the current year.

If you find you do need to include an amount on line 8, follow these steps:

  1. From within your TaxAct® return (Online or Desktop), click Federal.  On smaller devices, click the menu icon in the upper left-hand corner, then select Federal.
  2. Click Other Income in the Federal Quick Q&A Topics menu to expand the category and then click Prizes, awards or other miscellaneous income
  3. On the following screen enter the description as Refund of overpaid interest and enter the amount calculated as taxable in the current year.

This entry will result in an adjustment on Line 8 of IRS Schedule 1 (Form 1040). When the return is printed, a supporting details sheet will print with the description and amount to explain the adjustment.