If you own a home or are thinking of buying one, you’ve probably heard about tax breaks for homeowners.
Buying a home is typically the largest investment that everyday, ordinary folks make in their lifetime. A little planning goes a long way toward ensuring that you get the most value from homeownership. One way to create value is to reduce expenses – and tax deductions can help cut into your overhead.
When it comes to tax deductions, there are various benefits instituted by the government, aimed at encouraging more people to own homes. You can take advantage of these tax advantages by comparing your standard and itemized tax deductions and settling on the scenario with the highest tax benefits. Here are some itemizations that can help you make that determination.
Mortgage Interest
The deductions on mortgage interest are among the biggest tax benefits you can get on your home. Mortgage interest refers to any interest paid on a debt secured by the primary residence or second home. (Deductions are not applicable for interest paid on a personal loan, just home loans). Interest deductions can be taken up to $1 million of the loan used to acquire or improve the home.
At the beginning of each year, your lender should provide you with Form 1098, detailing the total amount of interest you paid in the previous year. Check the settlement sheet to ensure that Form 1098 includes the interest you paid from when you closed on the home, to the last day of that month.
Mortgage Insurance Premiums (MIP)
Mortgage insurance premiums refer to extra fees paid to protect the lender should a borrower default on a home loan. These premiums are paid by buyers who make a down payment of less than twenty percent of the loan amount. Mortgage insurance premium deductions can be made on home mortgages issued from 2007 onward.
According to the IRS, if the adjusted gross income as indicated on Form 1040 is more than a hundred thousand dollars or fifty thousand dollars if you are married and filing separately, the amount of deductible mortgage insurance is reduced. The statement on the mortgage insurance premiums is available in Form 1098.
Mortgage Points
Mortgage points are fees paid directly to the lender/broker at closing in exchange for a lower interest rate. Points are deductible as interest if the loan is secured by the home and the amount you deposited at the closing as down payment is equal to the points.
It does not matter whether you or the seller paid the points; you are entitled to the deductions as long as you meet the minimum requirements. You will be able to deduct your points in the same year you pay them if you itemize them on Schedule A of IRS Form 1040.
Home Improvement Expenses
If you have made home improvements, keep the receipts and other documents safely. Those expenses become tax breaks when you decide to sell your home. Current, the law allows you to add all the home improvement expenses on the purchase price of your home thus reducing the capital gains taxable amount.
IRA Payouts
As a first-time home buyer, you can take advantage of the IRA penalty-free withdrawal for your down payment. IRA rules allow you to withdraw up to $10,000 to help build or acquire a home for yourself or loved ones. The money must, however, be used to build or buy a first home within 120 days from the time it’s withdrawn. You can be considered a first-time buyer as long as you have not owned a home in the last three years.
However, even though not penalized, the IRA withdrawals are subject to federal and state tax. It is therefore not advisable to tap into this account unless there is no other option. Alternatively, you can withdraw your contribution to a ROTH IRA account, which is usually penalty free and tax free. The best thing about a ROTH is that after five years, you can withdraw up to $10,000 of earnings for first home purchase without incurring any taxes or penalties.
Tax-Free Profit From Sale
Another tax break for homeowners is in the capital gains; a single person can sell a home for a profit of $250,000 and not pay a dime in taxes. Likewise, a married couple can sell a home and make a profit of $500,000 and still not pay anything in taxes. However, some conditions apply.
First, the home on sale must be your principal residence, and you must have lived in it for two of the five years before you sell it.
Energy Credits
You can earn an additional tax break on your primary residence through energy-saving home improvement practices. For instance, you can get credit for up to ten percent of the cost of installing things like insulation systems, qualifying central air conditioners, energy-efficient heat pumps, furnaces, water boilers and water heaters.
The credit can extend up to thirty percent of the cost for more expensive energy-efficient equipment.
Home Equity Loans (HELs)
When your home appreciates in value, you can use the equity as security to borrow more money. Like a regular mortgage interest, the interest of home equity loans is tax deductible. Federal tax law permits mortgage interest deductions on up to $100,000 in home equity loan.
Adjust Your Withholding
The best place to check whether you are overpaying or underpaying your taxes is the W-4 form you filed with your employer. If you are always finding out that you have underpaid your taxes, check whether you are getting the mortgage interest and other deductions as required.
There are numerous ways you can genuinely claim deductions on your taxes. For instance, you can claim a deduction if you have a side job, a side business or you do some freelancing. Ensure you adjust your W-4 withholding by following the instructions on the IRS website.
