If you are a home owner, you may enjoy having your own place and yet feel overwhelmed with the financial responsibility. While owning a home can be costly, the government does offer some tax relief to lessen your financial burden. As a homeowner, you may be able to take advantage of several tax incentives.
To utilize many of these tax breaks, you cannot claim the standard deduction. Instead, you must itemize your tax return.
The Most Important Tax Deductions
While there are several tax deductions you can take as a homeowner, these deductions are likely to have the greatest impact on your tax status.
Deducting Mortgage Interest. Home mortgage interest rates are at record lows, but when you buy a home that costs several hundreds of thousands of dollars or more, the interest can add up. You are able to deduct the interest you paid up for a home loan up to one million dollars. To deduct this, use the 1098 form your bank sends you in January and Schedule A when filing your taxes. This deduction may not apply if you took out a mortgage that wasn’t to buy, build or renovate your home.
Property Taxes. You can deduct property taxes paid to the proper taxing authority, either through escrow or directly. You can also deduct your share of the taxes that you paid at closing.
Points. If you had to pay points when you closed on your loan, you can deduct a portion on your tax return. Generally, you cannot deduct the entire amount as you must spread the deduction over the life of the loan. (There is an exception that will allow you to deduct all your points in the year they were paid, but you must meet nine requirements. You can see all of the requirements here.)
Penalty for Paying off the Mortgage Early. If you had to pay a penalty for paying off the mortgage early, you can deduct that expense as well.
If you are a minister or in the military and have a housing allowance that is not taxable, you can still deduct your mortgage interest and real estate taxes.
Expenses You Can’t Deduct
While the government wants to help you own a home by offering several tax deductions, there are also several expenses that you cannot claim for a tax deduction including:
-insurance (other than private mortgage insurance)
-depreciation of your home
-the cost of utilities
-forfeited deposits, down payments, and earnest money
Owning a home is probably the greatest financial responsibility you will have. It is probably the largest purchase you will make, and you may pay for your home over 30 years or more if you refinance. The U.S. government recognizes that home ownership is both important and expensive, so they offer a variety of deductions. Make sure to take advantage of all of the home ownership deductions you can to both limit your tax burden and make owning a home more affordable.
What deductions most help when you are filing your taxes?