While the filing deadline won't come for a couple more months, tax season is upon us. Luckily, there are five major benefits to owning a home that you can take advantage of to lower your tax bill. Whether you own a single-family home, condo, mobile home, townhouse, or co-op, make sure you're taking advantage of all the tax breaks for which you qualify.
The downside to this is that you'll have to say goodbye to the simple-to-file Form 1040EZ. Because you'll be itemizing deductions (rather than taking the standard deduction), your tax preparation will be a bit more complicated, so you'll need to use a long-form 1040 and a Schedule A (for detailing your deductible expenses). However, the potential savings on your tax bill could be well worth the inconvenience.
Some deductions only apply to certain homeowners, so before adding them to your taxes, make sure you meet the qualifications.
This is probably the number one deduction, and it's available to all homeowners who are still paying down their mortgage. And because the majority of your monthly payments go toward loan interest, it can be a significant tax break. Each January, your lender will send you a Form 1098, which shows how much interest you paid on your mortgage in the previous year - and how much you can deduct on your taxes.
Most likely property taxes make up another portion of your monthly mortgage payment. If that's the case, your lender puts that monthly amount into an escrow account and sends your tax payment to your city or town twice a year. Unless you pay those taxes out of pocket, that information will also appear on your Form 1098. If you make payments directly to your municipality, you'll need to locate your tax bill. If you can't find that, you should be able to get the amount directly from your city or town.
If you paid fees (aka points) to your lender to obtain your mortgage, you can deduct that amount as well. If this is your first mortgage, you can deduct them in the year you paid them - as long as the mortgage is for your primary residence and the amount you paid isn't excessive. For a refinanced mortgage, you'll be able to deduct them over the life of the loan.
Construction Loan Interest
Did you build your home, rather than purchase an existing home? If so, did you take out a construction loan? If you answered yes to both questions, you may be able to deduct the interest on that loan. You can only take that deduction during the first 24 months of the loan, regardless of whether the construction takes longer than that.
In order to take advantage of this tax credit, you have to have installed energy-efficient windows, doors, and skylights by the end of the year. You must also have installed them in your primary residence and they have to meet the requirements of the Energy Star program. The maximum deduction is $1,500 and not all Energy Star-qualified products are eligible for a tax credit. You'll find more information here.
One of the biggest misconceptions about tax deductions is insurance premiums. Homeowners' and property hazard insurances are not deductible. Mortgage insurance may be deductible, but because eligibility is very narrowly defined, only about 25 percent of homeowners qualify, according to the IRS. Among the other non-deductible home-related expenses are homeowners' association dues, additional principal payments, depreciation of your home, closing costs, and local assessments that increase the value of your neighborhood (such as new sidewalks or utility connections).
This is just a general overview of some of the major deductions available to homeowners on their Federal income tax returns. As stated above, you may not be eligible for all of them. You may also find that the standard deduction ($11,900 for married couples filing a joint return or $5,950 for individuals and married couples filing separately) is higher than the total of these homeowner deductions, in which case you'll want to take the standard deduction (which will also allow you to use that less-complicated Form 1040EZ).
If you're still not sure which of these deductions you're able to take, check out IRS Publication 530, which lays out what you can and can't deduct in more detail.