After your mortgage has been secured, the closing costs have been paid and your boxes are unpacked and settled into your first home, it’s time for you to sit back, relax and enjoy the many benefits that home ownership provides. It’s no secret that owning a home is one of the best tax breaks handed out by the federal government. A variety of tax breaks are given out to home owners, but no such breaks exist for those who choose to rent. If you’ve recently taken the plunge and purchased your first home, use this helpful guide to learn about how your tax filing process will be different – and learn how much money you can expect to save.
Schedule A – Renters don’t have the ability to claim any deductions on their taxes, but as a homeowner, you have several deductions you get to claim. The three biggest home related deductions are your mortgage interest, any points connected to your home loan and your property taxes. You’ll itemize these deductions when you file your long form 1040 and detail the deductible expenses on Schedule A. Doing this on your own the first time can be confusing, so you may want to hire a professional to walk you through it your first tax season as a home owner.
Your Mortgage Interest Write-Off – Out of your three major deductions, your mortgage interest will more than likely be the largest one. During the first few years of owning your home, most of your mortgage payments will go straight to interest, so your highest deductions will be during this few years. Make sure you fully account for all money that was paid toward interest on your mortgage to make sure you get the maximum deduction.
Pay Attention to Your Points – Your 1098 should list any points you paid for your mortgage. A point translates to 1% of your loan amount. Many home owners choose to pay points to obtain a lower interest rate on their mortgage. The IRS lets you deduct points for the tax year that you purchase the home. You include the points paid in the same section of Schedule A where you claim your mortgage interest.
Property Tax Deductions – The third major home-related tax deduction is your real estate taxes. Real estate tax deductions are dependent on when you bought your home and your jurisdiction’s tax year. The tax year typically runs from January to December. Problems arise if your buy your house in July and taxes are due in March, because the seller prepaid the taxes on the home for the full year when they filed in March.
Other Deductions – In some cases, you might be able to write off other expenses related to owning your home. For example, if you moved because of your job, you may be able to write off relocation expenses. If you’re self-employed, you can write off a portion of your mortgage and associated bills as business expenses. Home renovations that are done because of medical issues or disabilities, such as building a wheel-chair ramp, may also be deductible.
What Isn’t Deductible? – When filing taxes for the first time as a home owner, try not to get too carried away with the deductions. Not everything related to owning a home is deductible. For example, non real estate taxes aren’t deductible, private mortgage insurance is not deductible, furnishing and décor are not deductible and your regular bills are not deductible.
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