Owning a home is fun and something to be proud of. It can also have unexpected expenses and be a lot of work if you own an older home. But no matter how old your home is, you could get some of that money back at tax time. Yes, believe it or not, the IRS offers tax breaks and incentives for homeowners. Let’s explore six of them now.
Private Mortgage Insurance (PMI) – If the equity in your home loan is less than 20%, you’re required to buy this insurance. Why? In case you default on your loan, this insurance will protect your lender. But the good news is you might be able to claim your premiums as a deduction on your tax form. Just remember that if your adjusted gross income (AGI) is above $109,000 for couples and $54,000 for individuals you won’t be allowed to claim your mortgage insurance premiums. If you are married and file separately, you still won’t be able to claim your premiums if your AGI is above $54,500.
Property Taxes (a.k.a. Real Estate Taxes) – Yes, it’s true, you’re allowed to deduct the entire yearly amount of your property taxes on your federal income tax return. But most homeowners don’t pay the property tax bill outright; it’s tucked in an escrow account as part of their mortgage monthly payment and the mortgage company uses that money to pay the property taxes to your city or town. Once the property tax is paid, then you can write them off of your tax return. You might notice on your settlement document that there are other items that appear to be taxes such as appraisal and attorney charges, credit report fees, transfer taxes and title insurance. But don’t be fooled—you can’t take a deduction for these things. If you’re a member of the clergy or in the military, you’ll be pleased to know that, despite getting housing allowance, you can still claim your mortgage interest and property taxes.
Mortgage Interest – This is a huge deduction that many Americans take every year. When you buy a home, most of the monthly payments go toward interest rather than the principle of the loan. Each year, all of that interest you paid is deductible on your federal tax form and you’ll receive a Form 1098 from your lender with the deductible amount. However, if you’re filing jointly and your home loan is more than $1 million or $500,000 filing single, you can’t claim your mortgage interest.
Mortgage Points – Did you buy your home last year? If so, then you could be eligible to deduct your origination and discount points at tax time. But what are points? Simply put, it’s just one of the fees that are charged by your mortgage company. The IRS believes points are prepaid interest; therefore, one point equals 1% of your principle loan amount. For example, if you got a home loan for $150,000, a 1% fee would cost you $1,500—that’ll add up over the year! Yet it can be a little tricky figuring out how to take this credit. If you got a home loan to build or buy your first home then usually there isn’t a problem deducting it all at once. However, if you refinanced your first home or purchased a second home, then you’ll need to spread the deduction out through the life of the loan.
Energy-Efficient Enhancements – With all the talk of “going green” the past few years, many are upgrading their home with energy-efficient products. You can receive an Energy-Efficiency Tax Credit of a lifetime limit of no more than $500 if you installed last year such items as energy-efficient windows, insulation, storm doors, heating and air conditioning units or a metal or asphalt roof.
Likewise, if you upgraded your home with wind turbines, solar electric equipment or a solar water heater you could receive the Renewable Energy-Efficiency Property Credit; you’ll get to claim a walloping 30% of the total cost of your new equipment—including installation! But the equipment must be bought within the last year to claim it on your taxes.
Home Office Deduction – Many people today work from their home and have a dedicated space for their work. If you’re one that has a home office, you might meet the guidelines of the IRS. For instance, if 5% or more of the home’s square footage is used for your business, you could be entitled to a 5% credit towards your home’s insurance, general repairs, utilities, property taxes and other things. But don’t forget that the IRS has strict guidelines as to what represents a home office that’s exclusively and regularly used.
So while death and taxes are a sure thing, so are homeowner tax breaks! There are plenty more tax deductions for owning a home, we just couldn’t list them all here. April 15th is approaching fast so get your information together and reap the rewards. Please contact us for more details about owning a home. You should also speak with a tax advisor about your unique situation.