It’s tax time, and for many first-time homeowners, the confusion is just settling in. When it comes to taxes, many homeowners throw up their hands in frustration and take the easiest way out.
Whether this is dropping your papers in the mailbox to an accountant, or going through a DIY tax program, doing taxes as a homeowner can be overwhelming. We've compiled a list of deductibles that homeowners should know about – and take advantage of. Just make sure you're covered with a home insurance policy.
When you buy a home, your lender will typically require you to pay what’s termed as “points”. A point is typically equal to 1 percent of the total loan amount. A 30-year, $150,000 mortgage might have a rate of 7 percent, but come with a charge of 2 points, or $3,000. There are two types of points: discount points and origination fee points.
Discount points, in laymen’s terms, is prepaid interest. These points are tax deductible. Origination fee points are typically charged by the lender to cover the costs associated with offering the loan. If the origination fee is used to obtain the mortgage, and not to pay for other costs, it's deductible.
There are other stipulations that the points must meet in order to be tax-deductible. The points may not cover fees that would typically cover items such as notary fees, appraisal fees, or property taxes. The IRS looks for loans where the point costs are unusually high, but the costs associated with the loan are oddly low.
2. Real Estate Taxes
Real estate taxes are always able to be deducted. While having a tax-deductible tax seems odd, you don't have to pay income taxes on money you've already paid to the IRS in taxes. Typically, when you pay your mortgage, a portion of that money goes into an escrow account to pay your taxes.
Your lender pays these periodically, and will send you a statement reflecting the amount you've paid. Lenders typically want you to have an escrow account in order to ensure that you are continuing to pay for home insurance and taxes to protect their investment in the home.
3. Mortgage Interest
If you bought a home during the last 12 months, you have most likely paid some sort of interest. In fact, new homeowners' monthly mortgages are usually compromised of mostly interest. Since these are tax-deductible, this can be a huge tax perk Many homeowners anticipate these tax breaks, and include it in their decision of whether or not to purchase a home.
There is a limit to this deduction, however, for homeowners who choose to itemize their taxes. The mortgage may not have a balance of more than $1 million. Your lender will send you a Form 1098 at the beginning of the year which will list the mortgage interest you paid.
This total is the amount you are able to deduct on your Schedule A form. This 1098 should also include any interest you ended up paying from the date you closed on the home until the end of that month. Interestingly, you may deduct it whether or not the lender includes it on the form.
4. Mortgage Insurance Premiums
The majority of homeowners will pay less than 20 percent down for their home, which means that they will be paying for Private Mortgage Insurance, which is meant to protect the lender if you default on the loan. This insurance, termed PMI or MI, is available for those who signed a loan after Jan 1, 2007.
Those who qualify have an adjusted gross income between $100,000 and $109,000 (or $50,000 each if filing married, but separate). You may deduct 10 percent per $1,000. This amount is seen as additional interest, and can be deducted on line 13 of Schedule A. The amount you paid for the year will be located on your form 1098. This deduction does not include home insurance.
5. IRA Withdrawls for Down Payments
The government wants you to buy a house. It helps our economy and adds value to a neighborhood. So, the normal penalty for early traditional IRA withdrawls is waived if you're using the funds to purchase a home. And the home doesn't have to be just for you.
You can withdraw up to $10,000 during your lifetime from an IRA to purchase a home for yourself, your spouse, children, grandchildren, or other close relatives. However, you should consult with a tax professional or estate attorney before doing this, as you do have to pay taxes on what you withdraw. Additionally, 401(K) plans do not have this benefit.
6. Energy Credits
The government also loves it when you save energy; so much so, that they offer 10 percent of the materials bill as a tax credit. Additionally, the IRS offers set credits for items like stoves and refrigerators. When doing upgrades to your home, for example, if you upgrade to energy efficient lighting to the tune of $400, you'll get a $40 tax credit, which directly reduces your tax bill. If you do a whole slew of upgrades, this number could skyrocket.
7. Your Home Office
If you are like the 30-plus percent of people who use a home office to telecommute, you can most likely deduct a portion of your mortgage and utility bills from your taxes. Be careful when doing this, however, and be honest. You must actually use the office as a primary work space in order to qualify for the tax break.
When buying a home, it's important to have your assets and belongings covered from damage with adequate insurance. An agent can help you navigate confusing homeowners insurance policies, suggest coverages, and even help you file a claim.