A home is where you live and raise a family. That is the first priority and primary reason to own a home. But the Federal government does give tax breaks to homeowners that can help you reduce some of the expense of owning your castle. And it can be more cost effective than renting after you claim the tax breaks you’re entitled to. Here are some of the better tax breaks you may qualify for. In all cases consult your tax advisor and see if any if these tax breaks will save you money on April 15th.
Homeowner Tax Break #1: Mortgage Interest Deduction
One of the neatest deductions itemizing home owners can take advantage of is the mortgage interest deduction, which you claim on Schedule A. To get the mortgage interest deduction, your mortgage must be secured by your home — and your home can even be a house trailer or boat, as long as you can sleep in it, cook in it, and it has a toilet.
Interest you pay on a mortgage of up to $1 million — or $500,000 if you’re married filing separately — is deductible when you use the loan to buy, build, or improve your home.
If you take on another mortgage (including a second mortgage, home equity loan, or home equity line of credit) to improve your home or to buy or build a second home, that counts towards the $1 million limit.
If you use loans secured by your home for other things — like sending your kid to college — you can still deduct the interest on loans up $100,000 ($50,000 for married filing separately) because your home secures the loan.
Ask your accountant or tax preparer for more information.
Homeowner Tax Break #2: PMI and FHA Insurance Deduction
You can deduct the cost of private mortgage insurance as mortgage interest on Schedule A if you itemize your return. The change only applies to loans taken out in 2007 or later.
What’s PMI? If you have a mortgage but didn’t put down a fairly good-sized down payment (usually 20%), the lender requires the mortgage be insured. The premium on that insurance can be deducted, so long as your income is less than $100,000 (or $50,000 for married filing separately).
If your adjusted gross income is more than $100,000, your deduction is reduced by 10% for each $1,000 ($500 if married filing separately) that your adjusted gross income exceeds $100,000 ($50,000 if married filing separately). So, if you make $110,000 or more, you lose 100% of this deduction (10% x 10 = 100%).
Besides private mortgage insurance, there’s government insurance from FHA, VA, and the Rural Housing Service. Some of those premiums are paid at closing and deducting them is complicated. A tax adviser or tax software program can help you calculate this deduction. Also, the rules vary between the agencies.
Homeowner Tax Break #3: Energy Tax Credits
The energy tax credit of up to a lifetime $500 had expired in 2011. But the Feds extended it for 2012 and 2013. If you upgraded one of the following systems this year, it’s an opportunity for a dollar-for-dollar reduction in your tax liability: If you get the $500 credit, you pay $500 less in taxes.
- Biomass Stoves
- Heating, ventilation, air conditioning
- Roofs (metal and asphalt)
- Water heaters
- Windows, doors, and skylight
- Storm windows and doors
Some of the eligible products and systems are capped even lower than $500. New windows are capped at $200 — and not per window, but overall. Read about the fine print in order to claim your energy tax credit.
Determine if the system is eligible. Go to Energy Star’s website for detailed descriptions of what’s covered. And talk to your vendor.
The product or system must have been installed, not just contracted for, in the tax year you’ll be claiming it.
Save system receipts and manufacturer certifications. You’ll need them if the IRS asks for proof.
File IRS Form 5695 with the rest of your tax forms.
Homeowner Tax Break #4: Property Tax Deductions
You can deduct on Schedule A the real estate property taxes you pay. If you have a mortgage with an escrow account, the amount of real estate property taxes you paid shows up on your annual escrow statement.
If you bought a house in 2012, check your HUD-1 Settlement statement to see if you paid any property taxes when you closed the purchase of your house. Those taxes are deductible on Schedule A, too.
Homeowner Tax Break #5: Homebuyer Tax Credit
There were federal first-time home buyer tax credits in 2008, 2009, and 2010.
If you claimed the home buyer tax credit for a purchase made after April 8, 2008, and before Jan. 1, 2009, you must repay 1/15th of the credit over 15 years, with no interest.
If you used the tax credit in 2009 or 2010 and then sold your house or stopped using it as your primary residence, within 36 months of the purchase date, you also have to pay back the credit. Example: If you bought a home in 2010 and sold in 2012, you pay it back with your 2012 taxes.
Those repayment rules are less rigorous for uniformed service members, Foreign Service workers, and intelligence community workers who get sent on extended duty at least 50 miles from their principal residence.
Members of the armed forces who served overseas got an extra year to use the first-time home buyer tax credit. If you were abroad for at least 90 days between Jan. 1, 2009, and April 30, 2010, and you bought your home by April 30, 2011, and closed the deal by June 30, 2011, you can claim your first-time home buyer tax credit.
This article provides general information about tax laws and consequences, but shouldn’t be relied upon as tax or legal advice applicable to particular transactions or circumstances. Consult a tax professional for such advice; tax laws may vary by jurisdiction.
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