Editor’s note: These tips are for informational purposes only.
The tax man cometh. He always does. For U.S. homeowners, though, the bite of a federal income tax can be reduced. For homeowners who itemize their tax deductions, there can be rewards for buying and owning a home. It’s worth the added effort, too.
So, where do you look for federal income tax deductions? Look all around you; they are everywhere.
Tax Deductions For Mortgage Interest Paid
Under current tax law, mortgage interest is tax-deductible. You see it every month on your mortgage statement and you pay it diligently along with your payment. Now, get the benefit when tax time arrives.
Mortgage interest paid to a lender is tax-deductible. And, for some homeowners, it provides the largest federal income tax break of all available homeowner tax deductions.
Mortgage interest tax deductions aren’t just limited to first mortgages, either — they extend to second mortgages, too.
Monthly interest paid on home equity loans (HELOAN) and home equity lines of credit (HELOC) are tax-deductible for most of the U.S. homeowners who carry them on their homes, but with restriction.
For example, homeowners who raise their mortgage debt loan beyond their property’s fair market value will find that mortgage interest paid is ineligible for deduction. This scenario affects few U.S. homeowners, however.
The overwhelming majority of tax-fling homeowners are eligible to claim mortgage interest paid as a deduction.
Note that discount points paid at closing at considered a prepaid mortgage interest. Discount points paid, therefore, can be tax-deductible. Mortgage insurance paid, however, is not — at least, not any longer.
Mortgage insurance paid was tax-deductible between Jan. 1, 2007, and Dec. 31, 2013, but the tax-deductibility of mortgage insurance has not been renewed by Congress.
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Real Estate Taxes Paid Are Tax-Deductible
Another tax benefit of owning a home is the IRS allows homeowners to deduct real estate taxes in the year in which they’re paid.
Real estate taxes are typically paid twice annually. However, homeowners who escrow taxes and insurance with their home loans will pay 1/12 of their annual tax bill monthly.
For homeowners who escrow, mortgage lenders make it simple to itemize real estate property taxes paid on a return. A few weeks into January, you’ll receive a 1098 Form which lists mortgage interest paid in the prior year, along with a form detailing the amount paid into escrow and the amount disbursed from escrow to your local taxing authority.
You may claim the amount disbursed for real estate taxes on your federal income returns. You will receive a property tax deduction for each year you own your home.
If your home does not have a mortgage, or if you don’t escrow, keep track of your paid real estate tax bills and claim that amount with your federal returns.
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Renovations And Energy-Efficiency Improvements
The Internal Revenue Service credits more than just mortgage interest paid at tax-time. It hands out tax breaks for certain home renovations and appliance purchases, too.
The government’s EnergyStar.gov website is a terrific resource for U.S. homeowners. On it, you can check whether the stainless-steel refrigerator you purchased last year comes with a tax break ; or, whether the washer-dryer unit you recently replaced can lower your annual tax bill.
Look for the EnergyStar seal on your appliances. Many new units — refrigerators, freezers, and more — are federal tax credit-eligible in the year in which they’re purchased. You may find that you’re eligible for local and state tax credits, too.
EnergyStar tax credits are limited to just appliances, either.
When you buy new windows, new doors, new heating and cooling units, and anything which makes use of green energy, you may be increasing your federal income tax deductions.
Solar, geo-thermal and wind improvements all typically fall into the “green” category. Just be sure to keep your receipts — you’ll need them for when you file.
Tax Considerations For When You Buy Or Sell
Federal taxes are filed for complete calendar years but when you buy or sell a home, you’re often doing it mid-year. This leaves you subject to a pro-ration on some deductions; and ineligible for others.
For example, if 2014 is your first tax year in a home, the real estate taxes were likely divided at closing so that you and the seller paid the year’s tax bill for the period for which you owned the home only.
As a buyer, your share of these taxes is fully deductible.
As a seller, you may be subject to different types of tax liability.
For sellers, profits on a home sale of up to $250,000 ($500,000 for married, filing jointly) are exempt from capital gains taxes so long as you lived in the property for two years of the last five years as a primary residence.
Profits which exceed the capital gains exclusion are subject to taxes.
You may also be subject to additional taxes as a seller if you used a federal tax credit at the time of purchase, or a downpayment assistance program, which requires a minimum number of years of occupancy. Selling prior to these dates may require repayment on the initial tax credit or a tax upon your gains.
The IRS may provide tax relief if you’re selling because of a change in health, employment or other unforeseen circumstances.