A house is the most expensive thing you’re ever going to buy. It takes years to save for a down payment and a lifetime to pay off the mortgage.
The high cost dissuades many from buying a house, but buying is better than renting because one day your house payment is going to go away.
While owning a home is expensive, fortunately there are some tax breaks for the new homeowner. Here are 5 big tax breaks every homeowner should know come tax time.
Each month your mortgage payment is comprised of principal and interest. In the early years of your loan most of your payment will be made up of interest, unfortunately. But fortunately, new homeowners will have a higher tax deduction in April because of this.
The amount you pay in interest for the year reduces your taxable income by that amount. Say you made $60k but paid $10k in interest. Your taxable income will now be $50k. This roughly translates into about $3,000 savings more in your pocket.
Your lender will send you a Form 1098 at the end of the year or allow you to download the pdf within your account. The form is sent by January 31st and contains the amount of interest paid that year.
Real Estate Taxes
Your state or local government charges you a tax based on the value of your property. Typically you pay it every year or every 6 months. Many banks ease the burden a bit by having you pay into an escrow account every month.
Because many banks add property taxes to the mortgage, many homeowners aren’t aware of how much they pay in property taxes.
Property taxes paid during the year are also fully deductible and you can find them on Form 1098 as well.
Private Mortgage Insurance
If you didn’t make a down payment of 20% of the cost of your property, you’re probably paying mortgage insurance (PMI). It’s unfortunate you have this unnecessary added expense to pay, but the bright side is that it is either fully or partially tax deductible.
The amount you can deduct depends on your adjusted gross income. There’s a worksheet on the Schedule A instructions to calculate how much you can deduct. If you use efile yourself the software should be able to figure it out for you automatically.
You can deduct the fees you paid to get a mortgage on Schedule A as well. The IRS treats it as mortgage interest paid in advance. The fees paid will be provided on the same Form 1098 as well.
Energy Efficient Upgrades
New homeowners who invest in upgrading their homes with energy efficient upgrades can get a tax credit. This is through the federal Energy Star program. You can get 10% of the amount you spent, up to $500, given back as a tax credit.
Items include energy efficient heating and air conditioning systems, insulation, roof, windows and doors.
Keep in mind that laws change all the time, so by the time you read this, the rules may have already changed.