Major Tax Breaks for Homeowners
Have you ever wondered what the major tax breaks for homeowners are?
If you recently bought a house, you might have found yourself paying a lot of money in the first few years.
Between a downpayment, closing costs, home insurance, and any fees, you might just feel like you've signed up for more than you asked for.
While you might feel as though you're paying through the nose, there's a plus side.
You can actually end up seeing some of that money again in the form of a tax breaks.
If you're a homeowner, especially a new homeowner, you qualified for some major tax breaks for homeowners.
If this is your first time hearing about these breaks, however, you might not know where to begin.
"Just what kind of tax deduction does my home qualify me for?" you're asking.
The answer depends. However, no matter your circumstances you're bound to find a few tax deductions that apply to your home.
Here are 9 major tax breaks for homeowners.
1. Property tax
Usually, a chuck of your loan goes to paying property taxes. Your lender will collect this sum from you each mortgage and then pay the taxes on your behalf once a year. Some home owners choose to make the tax payments themselves, hence no tax paid through their lender.
Each year, you can use the annual statement you receive from your lender to claim a tax deduction .
New homeowners should keep in mind that if they paid a portion of their property taxes for 2017 at the end of 2016 that goes in their tax return for the fiscal 2016 year.
Additionally, when you purchased the home, you and the seller paid a portion of the property taxes up front. That information should be available in your closing package.
Remember, the portion you paid is tax deductible.
In general, you really want to keep tabs on the amount of property taxes you pay each year since its one of the major tax breaks for homeowners.
If your taxes rise, you want to make note of that. You want to give the most accurate picture the amount of property tax you paid on your return.
2. Mortgage interest
Have you ever looked at where the majority of your first mortgage payment goes?
In the past, homeowners couldn't really tell just where exactly their mortgage went. Now banks and lenders will usually provide you with some sort of online tool that shows you the break down of your payment.
It may shock you to discover that in the first few years most of your mortgage payments go to paying interest.
While this can be disappointing to hear at first, there's good news. All of that interest is tax deductible.
The only caveat is the amount must be below $500,000 if you're single, and $1 million if you're married or purchased a house jointly.
The neat thing about this little perk is that it applies to multiple properties as well. Therefore, if you own another house, or even an RV, the interest you pay on the loan is deductible.
However, you have to be able to prove that you spend sometime at this property. Otherwise the IRS will consider it a rental property and won't deduct the interest.
3. Penalty free IRA payout
If you're under the age of 59 1/2 and request an early payout from your IRA, you're likely to encounter an extra 10% income tax.
However, one of the exemptions to this steep tax rate is buying a home.
The IRS allows you to pull up to $10,000 from your IRA to make a downpayment on a home, without having to pay additional taxes.
Even better, having a spouse or being a legal guardian of a child or grandchild can also make you eligible to withdraw another $10,000 completely penalty-free.
Another option is to also borrow half the balance in your 401(k)--limited to $50,000. However, the interest you pay on this loan is NOT tax deductible.
Loans from 401k and other retirement vehicles can be tricky. Learn more about loans from a 401k account before you do it.
4. Mortgage insurance
If you managed to make a downpayment on a house that was less than 20 percent, you probably got stuck footing the bill footing for mortgage insurance premiums, also known as private mortgage insurance (PMI).
PMIs usually come in two forms. They're either tacked on as a fee you pay on a monthly basis to your lender, or you pay the full amount upfront at closing.
Lenders use PMIs to protect themselves against the possibility of you defaulting on your loan, or foreclosure.
The nice thing about this kind of insurance is that allows you purchase a home, even if you can't afford the full downpayment.
Even better: it's one the major tax breaks for homeowners that is most definitely applicable if you paid a PMI.
There are a few things to keep in mind, however:
- The house must have been purchased AFTER 2007.
- Your gross income on your return must be below $109,000 OR below $54,000 if you're married but filing separately.
- If you bought the house jointly, you can only file for a deduction for the amount YOU paid. (i.e, if you spilt the cost with another person, you can only claim half of the total amount).
5. Home improvements
If you take out a home improvement loan, the interest you pay is also tax deductible.
What's more, renewing your home adds to the overall value, and increase your tax basis. Your basis is basically a tax estimation of what your home is worth.
In general, the bigger your basis the less profit you walk away with.
But here's where things get interesting:
That rule doesn't apply if your house sells for less than $250,000 if you're single or $500,000 if you're married.
In that case, increasing the value of your home is something you should definitely do.
6. Mortgage points
Sometimes to get a reduced interest rate on your mortgage, you have to pay "points" to a lender.
Points are basically fees that you pay upfront to your lender.
Here's the thing:
This can be a really useful strategy if high interest rates are slapped on the loan.
Why? Because one point counts as 1 percent of your interest.
This means that on a loan for $300,000, one point will reduce your interest by $3,000.
While it might seem like a lot of money to fork over up front, it's one of the major tax breaks for homeowners. All you have to do is file a 1098.
7. Home office
If you work from home, or run a business from your home, this is definitely among the best major tax breaks for homeowners you should take advantage of.
However, according to Fool.com of the 26 million Americans that work remotely, only 3.4 million claim a home office deduction on their tax return.
Why is that?
Unfortunately, there's a prevalent misconception that claiming a home office deduction on your return can lead to an audit.
However, if you have the figures to prove it, you have nothing to worry about. Most of the time, the IRS won't even look over it twice as long as everything matches up.
And there are big savings to be had by claiming a home office.
First of all, you can write off whatever expenses it costs you to run your business from home, such as office supplies.
Additionally, there are portions of home expenses that can be deducted for your office. This includes things like a fraction of the electricity bill, home insurance payments, and even maintenance costs.
What percentage of these payments will actually be applicable to your tax deductions depends on the size of your office.
Something to be extremely cautious about, however, is only claiming this kind of deduction if you regularly work from home.
This means that 9 times out of 10 you operate your business from home.
This doesn't include occasionally answering an email, or the infrequent all-nighter.
8. Energy tax credit
Installing wind, solar, or another source of renewable energy to power your house also falls under one of the major tax breaks for homeowners.
The Residential Energy Efficiency Property tax credit is the equivalent of 30% of the cost of equipment and installation.
It doesn't stop there, however.
If you install wind, solar, or geothermal energy sources on your home, there's no maximum limitation on the tax credit. It's 30% of whatever YOUR expenses are.
However, keep in mind that the same rules don't apply for fuels cells. For these energy sources the maximum tax credit is $1000 per kilowatt.
9. Selling your home
Remember, when you sell your home you don't have to pay taxes on profits as long as the selling price is under the specified amount.
In other words, if you purchased your home for $150,000 and later on sold it for $200,000, you walk away with a $50,000 profit that's tax-free.
Otherwise, your tax basis is subtracted from your selling price.
So if you sell your home for $750,000 and your tax basis is estimated at $600,000, you walk away with $150,000 in profit.
Although taxes aren't something that anyone looks forward to (unless you're some kind of an expert) it's really important to remember that the IRS isn't out to get you.
Unless you make millions a year, there are a variety of tax deductions that apply to your return.
Even if you belong to the top ten percent, you can probably still find a few credits that apply to you.
Your home is a great place to start, but there are also other places were you can get a tax break too.
Before you file your next tax return, think about what deductions can apply to you, and even consider doing some research.
At the end of the day, the more deductions you rack up, the more money you'll see back in your pocket.