10 Homeowner Tax Credits and Deductions
Here is a look at 10 tax breaks the government gives to motivate Americans to purchase homes.
In most cases you can write off all mortgage interest up to $1.1 million for your primary and secondary residences. You can even write off property taxes. Home owners have numerous additional opportunities compared to renters for federal income tax deductions.
Credits for property taxes and other tax breaks are only offered to renters in 21 states and the District of Columbia.
According to the Congressional Research Service (CRS), in 2012 Americans took $68.5 billion in mortgage interest deductions (MID). This was a savings of around $1,900 on average for American homeowners. The MID tax breaks are fairly well known but here are some others homeowners will want to take advantage of:
These homeowner tax credits and deductions are like a gift from Uncle Sam and can significantly increase refunds for first-time home buyers as well as long-time homeowners.
Homeowner Tax Credits and Deductions
1. Points on home mortgage and refinancing: If you purchased a home, you can most likely write off both the origination and discount points on your tax returns. 1% of the principal loan amount is equivalent to 1 point.
In the eyes of the IRS, points are seen as prepaid interest.You will have to determine if you get to deduct all the points at once or if you have to spread the costs throughout the life of the mortgage. According to the IRS if you purchased your first home or got a mortgage to purchase that first home, you can take all the deductions at one time.
For refinance on the first home or a second home, it will probably have to be spread out, according to the IRS. If you don’t meet all the criteria to get the deduction upfront, it will have to be spread out over the mortgage life span. Check out the IRS’ guide called Tax Information for Homeowners for more details.
2. Interest on home-improvement loans: Home improvement loan interest is fully deductible up to $100,000 in debt according to the IRS. Also tax-deductible is the interest on paid on home equity line of credit (HELCO). However if the loan is worth more than the value of the home or it is over 100% loan-to-value, then the home loan isn’t deductible.
3. Property Tax: In most cases property taxes are tax-deductible, however all things that look like taxes on your settlement document might not be actual taxes. Appraisal and lawyer fees, title insurance and credit report costs cannot be written off, but transfer taxes can be.
4. Energy-efficiency tax credit: Making your home more energy efficient by installing energy efficient windows, storm doors, insulation, efficient air conditioning and heating systems, you will be eligible for a energy tax credit of up to $500, with a maximum of $200 being credited to windows. This credit is set to expire on Dec 31, 2016.
5. Renewable-energy tax credit: Installing renewable energy sources like sun and wind power systems to power your home, you might be eligible for the Renewable Energy Efficiency Property Credit.
The credit can be as much as 30% of the equipment cost and installation. The Solar Energy Industries Association stated that since 2010, over 600,000 American homeowners have added solar equipment to their homes.
6. Private mortgage insurance: PMI happens when you put less than 20% down when buying your house, so the mortgage has to be insured. The premium can be deducted when you file taxes as long as your income is less than $100,000 ($50,000 for those who file married filing separately). The AGI is reduced after $50,000 and goes away after $54,000.
7. Home renovation and improvement: You cannot write off the expense of home renovation like materials and labor. If you took out a home loan to pay the contractor and for materials you might be able to write off the interest.
8. First Time Home Buyer Tax Credit : First-time home buyers can take out up to $10,000 from traditional and Roth IRAs penalty-free to help with purchasing the home.
Spouses, parents, children or grandchildren can add another $10,000 from their IRA accounts for a total of $20,000 for a down payment. Up to 50% of your 401(k) can be used to purchase a home, but it is capped at $50,000. The interest on that 401(k) loan isn’t tax deductible like a regular mortgage loan.
Starting in 2010, if you utilized the first time homebuyer credit as of 2008, you had to repay this credit. This adds to your tax bill an additional $500 a year, for 15 years.
For those first-time homebuyers purchasing their homes in 2009 and 2010 who want to stay in their homes for a longer term, this credit does not have to be repaid. However, they must use this home as a principal residence within the thirty-six months they bought it.
If they do move before that time, they are responsible for the taxes the year they leave the home. This is called an accelerated repayment. Once you sell the home, if you, unfortunately, do not get a profit, but suffer an actual loss, you won’t have to repay the credit.
Accelerated Repayment Requirement Exceptions
As with all rules, exceptions may apply. Natural causes, death, and commitment to service are among the few.
The death of homeowner – If you, the sole homeowner dies, the early repayment requirement is waived. Your estate is not responsible for repaying any of the credit starting in the year of your death or any following taxable years.
Involuntary conversion – If you purchase a new home in two years because you sold your home or left your home because of an involuntary conversion, such as your home becomes destroyed in a storm, you’re not responsible for the accelerated repayment term.
Divorce – If the home is transferred to a spouse or former spouse due to a divorce, the other party can move within that time.
Service members – A service member who is deployed and stop using the home within the first three years as their primary residence also is waived the accelerated payments. This must be because of deployment, but more than 50 miles from their residence. They also must be gone for over 90 days.
Sometimes none of the above exclusions apply. If that is the scenario, anyone selling their home or stopped using their home as their principal residence would need to start repaying the credit back. They also need to add it to their tax due for the year following the sale.
D.C. Homebuyers Credit
In 2011, those D.C. residents were allowed a $5,000 federal credit for purchasing a home. That’s almost like the government applying $5,000 down towards their down payment. It also didn’t matter if the resident was a current D.C. homeowner or surrounding D.C. suburb owner, you may still qualify for this tax credit.
As the income hits above $70,000 for single tax return filers and $110,000 on joint returns, this tax return break starts phasing out. This credit did not get approved 2012 and after.
9. Ground rent: This is not very common but this happens in cases where the original homeowner owns the land under the house and the current homeowner owns the above ground property and pays “rent” to the original property owner.
With “ground rent” it reduces the overall property cost because the land value is not included in the overall property value.The IRS will let you deduct ground rent if the lease is more than 15 years. It will be like deducting for paying rent on a monthly or yearly basis. The deduction will not apply if you are intending to buy out the lessor’s interest.
10. Income and interest on reverse mortgages: Reverse mortgages are not considered income by the IRS but a loan advance, therefore the amount you receive is not taxable. However the interest accrued with a reverse mortgage cannot be deducted until the loan is paid off, therefore you cannot make deductions each year like a regular mortgage.
Turning to TurboTax for Help at Tax Time
When you turn to TurboTax online for help it will be like an interview. They will ask easy to answer questions while filling in the correct tax forms for you behind the scenes.
The answers you provide will enable them to see which home buyer tax credits and deductions you qualify for. In the event that you are unsure how to answer a question there are tax experts readily available to help you.
TurboTax provides you with easy importing of your w-2 information and step by step instructions to insure that you get every Homeowner tax deduction and credit that you are eligible for.
TurboTax insures that you get the largest refund possible. They even have a free tax refund calculator available that allows you to know the amount of money that you will be getting back.