Only Discount Points

• When you refinance, you may pay both discount points and origination points. Only the discount points, paid to lower the interest rate on your mortgage refinance, can be deducted. These points function as prepaid interest, so the Internal Revenue Service permits you to deduct them. Origination points count as a cost of initiating the refinance, so the IRS does not allow you to deduct those costs.
  
  

Over the Life of the Refinance

• Unlike discount points on an original mortgage, which can be deducted immediately, mortgage refinancing points must be deducted over the life of the loan. This decreases the value of your deduction even further. For example, if you take out a 20-year refinance and pay $5,600 in discount points, your deduction would be limited to $280 per year.
  
  

Reporting on Taxes

• For each year that you claim the deduction for refinancing points, you must file your income taxes with Form 1040 and report the deduction on Schedule A. For the 2010 tax year, the deduction goes on line 13 and the total of your itemized deductions goes on line 29 of Schedule A. Once you calculate your total itemized deductions, including your refinance points, copy that amount to line 40 of the 2010 tax year Form 1040 and subtract it from your taxable income. Form lines rarely change.
  
  

Potential Tax Savings

• The tax savings generated by writing off your refinancing points depends on your marginal income tax bracket. The higher your tax bracket, the greater your tax savings by writing off refinancing points. For example, writing off $500 of refinancing points saves you $150 if you fall within the 30 percent tax bracket, but only $50 if you fall within the 10 percent tax bracket. In addition, consider that you must forgo the standard deduction to claim the deduction for mortgage refinancing points.