As tax time is quickly approaching, you may be doing the last-minute scramble to pull together all your receipts, deductions, and income statements. But in the rush, you may be overlooking significant tax savings that homeownership can bring if you're planning to itemize your deductions this year. Already done with your taxes? The good news is that these are 12 tax saving tips you can plan ahead for -- and utilize next year, too!
The tax code allows homeowners to deduct the mortgage interest from their tax obligations. For many people, this is a huge deduction since interest payments can be the largest component of your mortgage payment in the early years of owning a home.
Some Closing Cost Deductions
The first year you buy your home, you're able to claim the points (also called origination fees) on your loan, whether they're paid by you or by the seller. And because origination fees of 1 percent or more are common, the savings are considerable.
Property Tax Is Deductible
Real estate property taxes paid on your primary residence and a vacation home are fully deductible for income tax purposes.
Tax Deductions on Home Equity Lines
In addition to your mortgage interest, you can deduct the interest you pay on a home equity loan (or line of credit). This allows you to shift your credit card debts to your home equity loan, pay a lower interest rate than the horrendously exorbitant credit card interest rates, and get a deduction on the interest as well.
This one's tricky, but it can lead to big savings. If you paid points for a refi, that amount is tax deductible. But remember, you have to spread that cost out over the term of the loan - and only take a credit for the adjusted amount each year.
Home Sweet Second Home
You can also claim a mortgage interest deduction on a second home. Don't forget to adhere to this guideline: You can only write off the interest of the total mortgage debt of BOTH your first and second homes up to $1.1 million. Property taxes are also deductible.
Plan a Short Rental
If you rent out your second home for less than 14 days, that income is all yours and not taxable. And even if you go for the big bucks -- renting for $5,000 or $10,000 a week -- it still stays in your pocket. But if those guests want to stay past 14 days or you rent for more than 14 days total during the year, all that rental income is now taxable.
You Get A Capital Gains Exclusion
If you buy a home as your primary residence to live in for more than two years, then you will qualify. When you sell, you can keep profits up to $250,000 if you're single, or $500,000 if you're married, and not owe any capital gains taxes. It may sound ridiculous that your house could be worth more now than when you purchased it, considering these past few years of falling prices, but if you purchased your home any time prior to 2003, chances are it has appreciated in value, and this tax benefit will come in very handy.
Didn't See That Coming
If you sell in less than two years but move more than 50 miles away because of work relocation, health reasons, or certain unforeseen circumstances, you can pro-rate the taxes on your profit. That means you can keep 25, 50, or 75 percent of your profit, tax-free, depending on how long you have owned your house -- as long as it has been your primary residence.
Improving For Your Health
You can deduct the cost of home improvements required for medical care for you, your spouse, or dependents. For example, these are some items that qualify: entrance ramps, installing railings, adjusting the height of electrical fixtures to accommodate wheelchairs, and sometimes, even adding a Jacuzzi tub, if it's recommend by a doctor.
The Home Office Just Got Simpler
Do you have a room or a specific area of your home that is designated exclusively for your home office? One that would qualify as your primary place of business or serve as the location where you see patient or clients? In the past, this deduction was cumbersome to calculate. But under the new tax rules, you simply deduct $5 per square foot of designated home office space -- that's up to 300 square feet. Do the math, and you'll find the rules allow you to deduct up to $1,500.
Going Green Saves You Green
New energy-efficient improvements can save you two ways. Not only are you knocking down your utility bills, but Uncle Sam gives you thumbs up in the form of a tax deduction. If you make any significant improvements to your home that contribute to higher energy efficiency, like installing new double-paned windows, attic insulation, a new roof, or new exterior doors, you can deduct up to 10% of the cost (up to a maximum of $500). If you upgrade to any energy-efficient equipment, you get a credit of 30% of the cost. Think big ticket items like solar panels, geothermal heat pumps, solar water heaters, and wind-energy systems. You may also want to check locally to see if you can get some additional state tax breaks a well!