Tax deductions, credits, child care expenses, mortgage deductions. It can be confusing. If you just bought your first home or have owned for years, welcome to the world of taxes!
All those trips to Lowes have been worth it! You’ve taken part in the American dream of owning a home. Along with painting, plumbing, yard work and remodeling, you also have tax considerations.
take full tax advantage of your home.
Your taxes will likely get more complicated and here are some tax deductions that you shouldn’t overlook. In most cases, homeowners will itemize deductions on their tax returns. That means no more filing of the “EZ” form anymore.
Its time to move to Form 1040, 1040A and Schedule A, where you’ll have to detail your tax deductible expenses.
The downside is no more simple tax returns, since you’ll have to itemize on Form 1040 or at least file Form 1040A. But the money you’ll get back makes it all worthwhile. Now is the time for everyone, especially homeowners, to start getting your tax return paperwork in order.
If you own a home, you have one of the best tax advantages offered to most Americans. And it’s true; homeowners who itemize their taxes are able to deduct 100% of their mortgage interest and property taxes from their income tax returns.
But how do you get the maximum tax refund for homeowners? If you don’t own a home yet, there may be good reasons, but the advantages of owning a home far outweigh renting.
There are really only two reasons not to own a home-you may live rent free with your parents or friends or perhaps you are planning on moving in 3 years or less. Even if you are single, but plan on staying in the area for more than 3 years, consider buying a home.
The Internal Revenue Code allows you to write off many home owner expenses.The major tax incentive to owning a home is that it allows you to deduct the interest you pay for your mortgage. This is usually the biggest tax break for most people, because a significant amount of your house payment goes toward interest during the early years of a mortgage.
But even for people who don’t own a home, there are major deductions overlooked each year. Many credits can be claimed on Form 1040 or 1040A. Most simply require that you file another form with your return.
- Mortgage interest and property taxes used to acquire or improve your first residence and a second residence if you have one. Must itemize deductions on Schedule A and file Form 1040.
- Medically necessary home improvements.
- Mortgage insurance premiums.
- Home equity loans and home equity lines of credit can be deducted, if you spent the money on home improvements.
- Up to $10,000 withdrawn from IRA or 401K when used for down payment on your home.
- Residential Energy Credits. Check the latest credits at IRS.gov.
- Home office deduction for business use of your home.
To get the maximum tax refund for homeowners you will generally have to use Form 1040 and itemize your deductions. If you’re in a 25% tax bracket, the government effectively subsidizes about a third of your borrowing costs, making your home more affordable .
Also, your closing costs and points are tax deductible, and hundreds of thousands of dollars of any capital gains profit that you realize when you sell your home are exempt from income taxes.
At tax time, it’s critical to know what you’re entitled to, so you can claim it. So, here are 3 more essential tax tips to get the maximum tax refund for homeowners.
IRS publication 530 has all the details.
1. Fill out the long form at least once and learn to itemize your deductions.
Nearly 40% of homeowners lose out on the number one tax advantages every year when they fail to itemize their income taxes. If you own a home and otherwise have a fairly simple return, it might be tempting just to take the standard deduction or file Form 1040A.
In some cases where your mortgage, property taxes and income are low enough, the standard deduction may be larger than your itemized deductions. But you’ll never know unless you fill out both forms at least once.
Why do the extra work? You can only pay less tax, never more by using the longer Form 1040.
2. Home office deduction.
The average home office deduction is over $2,000. But just because you have a computer in the basement doesn’t qualify you to deduct it as an office expense. Maybe you have a small business and are the only employee.
There are special IRS rules on what you can claim as a home office. In addition, the space you claim as your home office cannot be exempted from capital gains tax when you sell your home.
3. Don’t forget the closing costs.
If you bought or refinanced your home, you may be focused on your mortgage interest and property tax deductions that you forget all about your closing costs. Remember that any origination fees or discount points that were paid to your mortgage lender at closing are tax deductible on your return.
When you finance a home, you may pay what are called “points.” Points lower the interest rate on your mortgage by effectively prepaying a portion of the interest at closing. Points are paid by the borrower to the lender as part of the loan deal, and they are a percentage of the loan. Points may also be called loan origination fees, maximum loan charges, loan discount or discount points.
Helpful Hint:There are two things you can count on when you become a homeowner: You get more tax breaks, and your taxes get more complicated. Whether you’ve purchased a single-family home, townhouse or condominium, tax breaks are available to you.
It’s time to get familiar with tax forms because that’s where you will have to provide all the details about your new tax-deductible expenses.
Know the difference between improvements and repairs
Fixing a leaky faucet or putting crown molding in the living room is not tax deductible. So save those Lowes receipts, but unless its an improvement and not a repair, it won’t be deductible.
But there are a number of items in the tax code that allow for tax breaks and credits. Many items covered under residential energy efficiency can provide tax credits, including new solar panels or energy efficient water heaters.
There are also deductions that can be made for some home office improvements, as well as for medically necessary changes, such as a wheel chair ramp or a handicap-accessible bathtub.
Owning a home is a big financial responsibility. For most people, it’s the largest investment you’ll ever make. Knowing your tax deductions and credits available can help ensure your big investment pays you back at tax time.
By Victoria Stone