Tax Preparation and Home ownership is one of the most rewarding experiences, but it comes with a lot of upfront costs. Luckily, the IRS offers several tax breaks that help make homeownership more cost-effective. However, in order to claim these deductions you must itemize instead of taking the standard deduction. Mortgage interest and property tax are two common home-related deductions. Private mortgage insurance premiums could also save you money.
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Mortgage interest payments make up an important portion of most monthly homeowner payments and can provide a tax break when itemizing returns instead of taking the standard deduction, offering greater tax breaks overall. Unfortunately, homeowners must take the time and effort to claim this benefit in order to reap its full value. This benefit is not automatic. Homeowners must take the initiative to claim this deduction. It takes more work, but it will give you bigger tax breaks.
According to the IRS mortgage interest can only be deducted if it was paid to purchase, build or substantially improve your primary or secondary home. This includes refinancing of debt secured by your primary or second home, as well as home equity loans or lines of credit for the same purpose. Only interest on debt related to improvements (like adding square feet or changing uses) meets certain criteria.
Mortgage points, upfront fees charged by lenders to reduce your interest rate and thus decrease monthly payments, may also be deducted as pre-paid interest and included on Schedule A as an itemized deduction. To qualify, your effective interest rate must be reduced by at least 1%.
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Property taxes are one of the main expenses that come with owning a home. While these taxes may seem costly, they're tax deductible and can help offset some of the high cost of homeownership in certain regions. To take advantage of the deduction, homeowners must itemize and exceed their standard tax deduction.
Homeowners who itemize can also deduct state and local income, property and sales taxes. The combined limit is $10,000 ($5,000 for married filers filing separate returns) of state and local taxes. This does not include transfer taxes or homeowners associations fees, which are typically included in closing costs deductions.
If you use part of your home for business use, such as an office or studio, expenses related to that use could be tax-deductible. This deduction applies to single-family houses, townhouses, apartments, condos and co-operative apartments - even mobile and manufactured homes!
Tax deductions may be available for medically necessary home improvements, such as grab bars in the bathroom or wheelchair ramps. You can also benefit from energy-efficient upgrades such as solar panels or windmills. However, to qualify for this deduction, you must have a letter from a physician certifying that the improvement is medically necessary.
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The IRS allows you to deduct certain expenses related to a home office. There are two methods you can use for claiming the deduction: regular and simplified. The amount of space in your home that is designated as an office will ultimately depend on whether or not it meets the requirements for a deduction (refer IRS Pub 587 Business Use of Your House for details).
To qualify for the home office deduction, an area in your home that is used exclusively and regularly to conduct your business or treat patients or clients must be designated as such. It could be any room, an area within a room or even an outlying structure such as a shed, garage or guest house - even an entire structure on your property!
Alternatively, for simpler calculations that don't exceed $300 of expenses you may use the simplified method - just keep receipts for any furniture, appliances or equipment purchased specifically for the office space.
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When purchasing a home with a Homepage mortgage loan, the IRS allows you to deduct mortgage points you pay upon closing. Each point usually costs one percent of your loan amount and reduces your interest rate by approximately 0.25 percentage points over its lifecycle. These deductions are usually spread evenly over the loan period, but under certain conditions can be deducted in one year.
To take advantage of the mortgage point deduction, it is best to itemize rather than taking the standard deduction. Your lender should issue you an annual 1098 mortgage interest statement which details how much interest was paid as well as an itemized breakdown of any points paid; box 6 of that document shows this figure. In addition to that deduction, property taxes paid out-of-escrow may also qualify - provided your municipality accepts it as an acceptable means for paying bills.
Home ownership offers you additional tax breaks. These include energy-efficient credits, deductions for home equity loan used to improve your house and meet certain standards and criteria. To qualify, improvements must meet significant and specific criteria - this could include making it accessible for people with disabilities or grading the ground accordingly.
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