10 Homeowner Tax Breaks 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 saving of around $1,900 on average for American homeowners.
This is a great opportunity for first-time home buyers, whose early monthly payments are mostly interest on a 30 year mortgage. About 50% of American homeowners used the MID in 2012. So what did the other 50% do? Most of them had already paid off their mortgages or the MID was less than a standard tax deduction.
These homeowner tax deductions are like a gift from Uncle Sam and can significantly reduce the financial burden for those still paying mortgages.
The MID tax breaks are fairly well known but here are some others homeowners will want to take advantage of:
Other Homeowner Tax Breaks
1. Points on home mortgage and refinancing: If you purchased a home in 2014, in addition to MID, which might be smaller if you bought later in 2014, 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 IS 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 in 2014 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 will 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, but it will have to be installed before the end of Dec 2016. The Solar Energy Industries Association stated that since 2010, over 600,000 American homeowners have added solar equipment to their homes.
6. 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.
7. 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.
8. Private mortgage insurance: 2014 is the last year that private mortgage insurance (PMI) claims can be made. If your adjusted gross income (AGI) is over $100,000 your deductions for PMI will be reduced. If your AGI is over $109,000 you cannot make the deduction. Filing separately if you are married won’t get around the deduction. The AGI is reduced after $50,000 and goes away after $54,000.
9. 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.
10. Buying a home: 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.
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 deductions and credits 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.