Tax season may feel like a burden for some Americans, but homeowners have plenty of advantages when it comes to claiming deductions. The U.S. tax code is designed to offer incentives to homeowners, and by taking advantage of these breaks, 1040-filing citizens can maximize their financial investment in homeownership.
Whether a home is financed via a mortgage, or paid-in-full with cash, there are a multitude of tax-savings opportunities associated with owning a home. Of course, every homeowner’s financial situation is different, so please consult with a tax professional regarding your individual tax liability.
Tax Deduction : Mortgage Interest Paid
Mortgage interest paid to a lender is tax-deductible and, for some homeowners, interest paid ca provide a large tax break — especially in the early years of a home loan. This is because the standard mortgage amortization schedule is front loaded with mortgage interest.
At today’s mortgage rates, annual interest payments on a 30-year loan term exceed annual principal payments until loan’s 10th year. Mortgage interest tax deductions are extended to second mortgages, too.
Interest paid on refinances, and home equity lines of credit (HELOC) are tax-deductible as well. However, restrictions apply on homeowners who raise their mortgage debt beyond their property’s fair market value.
The Internal Revenue Service (IRS) imposes a $1 million loan size cap. Loans for more than one million dollars are exempt from this tax deduction.
Tax Deduction : Discount Points
Mortgage tax deductions can extend beyond your monthly payment. Discount points paid in connection with a home purchase or a refinance are often tax deductible too.
A discount point is a one-time, at-closing fee which gets a borrower access to mortgage rates below current “market rates”.
As an example, if the current market mortgage rate is 5 percent, paying one discount point may get you access to a mortgage rate of 4.75%. The IRS treats discount points as “prepaid mortgage interest” which, in turn, can render them tax-deductible.
When discount points are paid in conjunction with a purchase, the cost may be deducted in full in the year in which they were paid, dollar-for-dollar. With respect to a refinance, discount points are not fully tax-deductible in the year in which they are paid.
With a refinance, discount points are typically amortized over the life of the loan. The cost of one discount point on a 30-year loan can be deducted at 1/30 of its value per tax-calendar year.
Other Deductions : Property Taxes, Renovations, Home Office
Real Estate Taxes
Homeowners typically pay real estate taxes to local and state entities. These property taxes can often be deducted in the year in which they are paid. If your mortgage lender currently escrows your taxes and insurance, it will send an annual statement to you which you can file with your complete federal tax returns. Your accountant can help determine the payment’s tax deductibility.
For tax-paying homeowners, certain types of home improvement projects are tax-deductible. Home improvements made for medical reasons, for example, can be tax-deductible. If you are making home renovations to accommodate a chronically ill or disabled person, and the renovations do not add to the overall value of the home, the project costs are typically 100% tax deductible. Repairs and improvements made for aesthetic purposes are not tax-deductible.
Homeowners who work from their residence can typically deduct the expenses of maintaining a qualified home office. Allowable tax deductions for a home office include renovations to the room(s), telephone lines, and the cost of heat and electric. Before claiming a home office on your returns, though, be sure to speak with an accountant to understand the benefits and liabilities. There are caveats to claiming home office tax deductions on your tax returns, and the rules can be tricky.
Homeowners : Budget For Your Tax Breaks
As you put away the holiday gifts, set aside an empty box to collect all the year-end tax documents for 2013 that will soon begin arriving in your mailbox. Among the papers to look for:
Form W-2 from your employer, which shows your gross income, tax-deductible contributions to your retirement and flexible-spending accounts, and state and federal taxes withheld from your paycheck.
There’s a flurry of 1099 forms from your bank, broker, pension and IRA administrators, and the Social Security Administration. These forms report taxable interest and dividends you received, plus any retirement income.
Form 1098 from your mortgage lender. It reports mortgage interest and real estate taxes you paid. If you paid college tuition or interest on a student loan, look for Form 1098-T or 1098-E.
Form 1099-G from your state if you collected unemployment during 2013.
Form 1099-MISC. Independent contractors should receive one from each client who paid $600 or more in 2013. If you think you’re missing a form, be sure to check your e-mail. And if you still haven’t received a document by January 31, contact your financial institution or other provider.
If you bought a home in 2013, make sure to give a copy of the final HUD closing statement to your tax preparer, so you can take advantage of all the write offs you are now entitled too. Let me know if you need a copy of this.
If you have questions about getting approved for financing, or you would like a free rate quote, please feel free to contact me directly at 858-442-2686 or just reply to this message.