January has come (and nearly gone!), bringing with it the promise of a new year filled with new beginnings–including the start of tax season. And while owning a home is a great investment, the taxes that come with home ownership can also bring a lot of uncertainty and confusion.
According to Bakke, “In most cases, you need to itemize your taxes in order to take advantage of all the tax breaks that accompany home ownership. This might seem overwhelming, but the benefits of completing this process make up for the inconvenience.”
1. Mortgage Interest Deduction
Mortgage Interest Deduction (MID) is one of the top tax breaks for homeowners, potentially saving you a significant amount of money. Bakke explains: “In the beginning, the majority of your monthly mortgage payments go toward loan interest, and you can deduct all the interest from your mortgage on your taxes. Keep Form 1098, issued by your lender, with your important records. This form explains exactly how much you can deduct and serves as proof if you are audited by the IRS.”
2. Mortgage Insurance Premiums
For homeowners with new mortgages, if your loan-to-value ratio is higher than 80%, you most likely carry some form of private mortgage insurance (PMI). Typically, “Once you reach 20% equity in your home, you can avoid paying private mortgage insurance.”
According to Bakke, “Until you reach that level of equity, if your adjusted gross income (AGI) is less than $100,000 (or $50,000, if married filing separately), you may be able to deduct the amount that you paid. If you surpass that income level, the deduction is either reduced or eliminated. If your AGI is $109,000 ($54,500, if married filing separately) then the deduction goes away altogether.”
3. Energy Star
The energy-efficient fixtures or appliances you installed can help save money on top of the savings you score with your monthly utilities bills. If you install energy-efficient windows, doors, and skylights in your primary residence before the end of the year, you could be eligible for another tax deduction. In order to take advantage of this tax break, you must install the items by the end of the year.
Assuming your installations meet the necessary criteria, including the Energy Star program requirements, “You can receive a tax credit equal to 10% of the cost of the products. The credit for windows and skylights is capped at $200, the limit for doors is $500, and you cannot deduct installation costs. The IRS does not state what documentation you need to prove that you paid for these costs. However, you should hold on to all receipts and Energy Star labels for any qualified improvements you make on your home. There are quite a few green energy tax deductions for home improvement.”
Points, the fees charged to the borrower when obtaining a home loan, may also offer a tax break to homeowners. According to Bakke, “If you have your first mortgage, you can deduct these charges in the year that you paid them if the loan is for your primary residence and you didn’t pay excessive points. If you have refinanced your mortgage, you can deduct points over the life of the loan.”
5. Property Taxes
You can also deduct state and local property taxes, “As long as they are based on the assessed value of the real property. If you pay your property taxes out-of-pocket, you need to locate your bills to determine how much you paid. Most homeowners pay through an escrow account; if you do the same, the information also appears on Form 1098.”
6. Construction Loan Interest
Did you take out a construction loan to build your home? You might qualify to be able to deduct the interest. However, this deduction is only usable during the first 24 months of the loan, even when the actual construction takes longer.
The Bottom Line
Staying organized and keeping impeccable records will help you TREMENDOUSLY, allowing you to take advantage of every tax break, deduction, and credit at your disposal. However, you may want to seriously consider consulting a tax professional, especially if you are preparing your taxes for the first time after you buy your home.
As Bakke points out, “You will likely encounter various technical restrictions and confusing guidelines, and you certainly don’t want any problems with the IRS. A professional can help you find more tax breaks, and you will get the best return on investment when you understand and take advantage of each and every one.”
Which tax breaks are you taking advantage of as a homeowners?