This article is for informational purposes only. If you’re seeking tax advice please consult with a tax advisor.
We’re sure that up until recently, you’ve probably only been claiming standard deductions on your taxes. Now that you’re a homeowner, you’ll learn to itemize the extra tax write-offs you’ll be claiming. To add some even better news to the mix, all of the donations you make to various charities, along with the taxes you pay to your state, will provide you with even more tax deduction opportunities. Below, we’ve listed 10 tax breaks that you should know about now that you own a home. They are:
- Mortgage interest
- Property Taxes
- Mortgage Insurance
- Tax & Penalty-Free IRA
- Home improvements
- Energy credits
- Home Sale Profits
- Home equity loans
- Adjusting your withholding
One of the most common tax breaks available to homeowners is the deduction of interest paid on a mortgage. Huge tax breaks come in the form of deducting mortgage interest for most people. Interest incurred on up to $1 million of debt obtained by acquiring and/or improving a home can be deducted.
Around January, you should receive a form 1098 from your lender that lists all interest paid on your mortgage the prior year. This information will be used on Schedule A as your deduction amount. It’s important to make sure that any and all interest that was paid since the day you purchased the home until the last day of that exact month is listed on a form 1098. The amount should be printed on the settlement sheet. In the event you find that it’s not listed, it can still be deducted. The US government will pay 25% of the interest on your behalf if you’re a part of the 25% tax bracket.
In order to obtain your mortgage when buying a house, lenders may require you to pay what is known as “points”. These “points” are typically a certain percent of the total loan. In order for the points to be considered deductible as interest, there are a few requirements that need to be met:
- It’s a secured loan by your home.
- The points you are required to pay our common for your area.
- The cash amount that was paid as a down payment was equal to the points.
Here’s an example:
For a $300,000 mortgage, you paid a total of 2 points (2%). If you contributed a minimum of $6000 (2% of $300,000 = $6000) towards the deal, the 2 points can be deducted.
*The points can be deducted in your taxes even in the event that the seller actually pays for them as a stipulation in the deal. Remember, this amount should be printed on your 1098 form.
Local property taxes can be deducted each year also. If you use an escrow account to pay your taxes, this amount may be listed on a form sent to you by your lender. You might find the amount listed in your checkbook registry or in your personal records if you pay your municipality directly. It’s possible that you might’ve reimbursed the seller for prepaid real estate taxes the year you purchased your home from them.
In this case, the amount you reimbursed them for will also be shown on your settlement sheet. You want to make sure to add this amount to get a deduction for real estate taxes. Keep in mind, escrow account payments cannot be deducted as real estate taxes. The deposit you made/make will be applied to future tax payments. Only the amount paid during the actual year can be deducted as real estate tax.
If a buyer makes a down payment for under 20% of the homes total cost, they usually incur premiums on their mortgage insurance. This is an extra charge used to protect the lender in the event the buyer can’t repay their loan. Buyers can now deduct these mortgage insurance premiums on all mortgages that were issued during or after 2007.
On tax returns listed as “Married – Filing Separate”, the deduction decreases more and more as the adjusted gross income rises above $50,000. The same thing happens on all other tax returns where the adjusted gross income rises above $100,000.
*This doesn’t apply to anyone who’s paying for mortgage insurance prior to 2007.
Tax & Penalty-Free IRA Payouts
There is a penalty of 10% for individuals who make “pre-age” withdrawals from their IRAs. To encourage home buying, this penalty does not apply to first-time homeowners who make withdrawals from their IRAs to use as down payments. However, the penalty is still imposed on individuals who make withdrawals from their 401(k) plans.
You’re allowed to withdraw up to $10,000 from your IRA in order to purchase or build your first home for you and/or any of your loved ones at any age completely penalty free. The only downside is, the $10,000 limit is for your entire lifetime. It is not on an annual basis. Each spouse and a married couple can take advantage of the $10,000 limit for a total of $20,000 together. The only stipulation is that within 120 days after its withdrawal, the money must be used to buy or start construction on your first house.
Here’s a great tip that you don’t want to overlook:
It’s a good idea to make sure you keep all records along with receipts for any and every improvement made to the home. No matter how minor or major they are, they will come in handy later.
Great Energy Credits
If you make energy-saving home improvements, you may qualify for what is known as “energy tax credit”. The special tax credits can be worth up to $500. Says they actually reduce your tax bill dollar for dollar, these tax credits tend to be more valuable than a typical tax deduction.
Things such as energy-efficient skylights, central air conditioners, furnaces, exterior doors and windows, water heaters, boilers, and even insulation systems can allow you to qualify for energy tax credits up to 10% of their costs.
More expensive and efficient energy equipment such as solar powered generators can qualify you for even better energy tax credits worth up to 30% of their costs. Good news is there is no dollar limit on these credits.
Tax-Free Profit on Sale of Home
The current tax law provides homeowners with another benefit of actually owning a home. In the event that certain requirements are met, a huge amount of profit can potentially be rendered tax-free. For example:
- Up to $250,000 can be considered tax-free for a person who is single and resided in the house for at least 2 of the 5 previous years before its sale.
- Up to $500,000 can be considered tax-free profit for individuals who are married and found a joint return. If the home was owned by one or both of the spouses, considered as a primary residence, and lived in for at least 2 of the 5 previous years prior to its sale by both spouses they will qualify for the tax-free profit.
For the most part, profit isn’t usually taxed. In the event, you take a loss on the sale, you can’t write the loss off as a deduction.
This tax exclusion can be used multiple times. As long as you meet all of the requirements and haven’t used the exclusion in the last 2 years on a different property, you’re good to go. Profits exceeding $250,000/$500,000 is reported as a capital gain on Schedule D form.
Home Equity Loans
After building up enough equity in your home, you can use it as collateral for borrowing additional money to use as you see fit. You can deduct the interest charged on a home equity debt as mortgage interest up to $100,000 regardless of how you plan to use the money.
A lot of Real Estate Investors will use this strategy as a way to build their portfolio. They use the equity in their own home to purchase another income producing property.
Adjusting Your Withholding At Work
You can collect all of the savings immediately by making adjustments to your federal income tax withholdings at your place of employment. This is highly recommended for individuals who will become itemizers for the 1st time due to the size of their mortgage interest created by their home. The proper form (W–4) can be obtained from your employer and/or by visiting www.irs.gov.
This article is for informational purposes only. It should not be considered tax advice. If you’re seeking tax advice please consult with a tax advisor.