Home Ownership Tax Breaks
Home ownership can be a financial burden, and even if you don't struggle with making mortgage payments, the tax breaks available for homeowners can really add up. Since the costs of home ownership exceed your prime mortgage amount to include maintenance, interest and more, tax breaks are a great way to relieve your finances at tax time. All of these tax breaks are considered tax deductions, and can only be taken when you itemize your taxes. This means that you will not be able to use the standard deduction and claim these tax breaks. Itemizing is not best for everyone's tax situation, especially if the standard deduction amount is more than the costs you would like to itemize. However, if itemizing is in your favor, here are some home ownership tax breaks you need to use.
Each mortgage payment includes mortgage interest, and at the end of the year, your interest can add up to be several thousand dollars. This is one of the biggest home ownership deductions available because you get a tax break for the entire amount of mortgage interest you paid throughout the year. In January of each year, your lender should send you a Form 1098, which shows the amount you paid in mortgage interest for the previous year. When your taxes are prepared, the amount of mortgage interest listed on your Form 1098 needs to be recorded on Schedule A, Line 10. If you didn't receive your 1098 by the time you prepare taxes, or if your loan is secured by a private party, the amount of mortgage interest you paid last year can be recorded on Line 11 of Schedule A. In this case, you will need to record your lender's address and Social Security number.
When you take out a mortgage, you often have the option to buy points in return for a better interest rate on your loan. If you bought points with your mortgage, and your mortgage is new, you can deduct the dollar amount paid in points as prepaid interest. You might also know points as discount points, origination fees or a loan discount; these are all eligible tax breaks. Your mortgage will need to meet qualification requirements; the loan must be for your primary residence and the points payment must be within the normal range for your area.
Real Estate Taxes
Each year, your home's value is assessed and real estate taxes are assigned. These real estate taxes are added into your mortgage. Each mortgage payment includes a portion of your real estate taxes. When you receive your Form 1098, the amount of real estate taxes you paid throughout the year will be listed. This amount, which is usually a sizable amount of mortgage payments, can be deducted at tax time. Real estate taxes are recorded as an itemized deduction on Schedule A, Line 6.
Private Mortgage Insurance
If you have a private mortgage insurance (PMI) policy that was issued after 2006, the premiums can be deducted as prepaid interest. If your income is above $50,000 (single) or $100,000 (married filing jointly), the deduction is phased out. The amount you paid in PMI can be found on your Form 1098. When preparing taxes, the PMI premium deduction can be taken on Schedule A, Line 13.
Home improvement costs will not become a tax break until you sell your house, at which time they are added to the basis (cost/value) of your home. Keep all your receipts anytime you take on a new project, including window upgrades and fences.
While home ownership offers many tax breaks, there are some costs of home ownership that cannot be deducted. Homeowner's and fire insurance cannot be deducted, even if they are a part of your mortgage payment. Title, mortgage or FHA mortgage insurance are not tax deductible. Principal payments on your mortgage are not eligible tax breaks. Also ineligible to be used as tax deductions are HOA (Homeowner's Association) fees, utility costs and closing costs. However, the above home ownership tax breaks provide a huge tax benefit for eligible homeowners. Use them if itemizing your taxes is most beneficial to your situation. If you have any questions regarding home ownership tax breaks, be sure to consult your tax professional.
If you do not already retain the services of a tax consultant you can find a comprehensive list of local accountants to choose from here.