Taking the leap into buying a house is exhilarating and exciting, especially for new homeowners. There will be some bumps and roadblocks along the way, but there is a big opportunity to ease the cost of your mortgage by taking advantage of several tax write-offs readily available.
Whether you are in the process of purchasing a new home or have already sealed the deal, here are several tips and tricks to keep in mind that could help you reduce your tax bill by hundreds or thousands of dollars. If you've been claiming the standard deduction up until now, these extra write-offs from owning a home almost certainly will make itemizing your deductions more beneficial.
Deduct real estate and property taxes. Did you know that you can deduct the local property taxes you pay each year? If you pay your taxes through an escrow account, the amount may be shown on the form 1098 you receive from your lender.
If you pay your property taxes directly to the municipality, check your records or your online statements from your bank or lender. If you purchased your home last year and reimbursed the seller for real estate taxes he or she prepaid for time you actually owned the home don't forget to look at your settlement statement for your tax deductible real estate taxes.
Home mortgage interest deduction. For most people, the biggest tax break from owning a home comes from deducting mortgage interest. You can deduct interest on up to $1 million of debt used to acquire or improve your home. Your lender will send you a form 1098 listing the mortgage interest you paid during the previous year. Now that you're a new homeowner, the ability to deduct mortgage interest will open you up to being able to itemize, and you will now be eligible for many more tax deductions such as the state and local sales tax deduction, unreimbursed employee expenses and charitable contributions.
You may be able to deduct any mortgage "points" paid. When you buy a house, you may have to pay "points" to the lender in order to get your mortgage. Mortgage points are prepaid interest paid to secure the loan. This charge is usually expressed as a percentage of the loan amount. If the loan is secured by your home, the points are deductible. The deductible amount you paid should be shown on your form 1098, but if it is not, you will find it on your settlement statement listed as "points" or "loan origination fees."
Save home improvement receipts. Even though you may have just purchased your home and probably aren't thinking about selling anytime soon, there is a chance that you will sell your home one day. Although most home sales do not result in income tax, it is possible if you move very quickly or make a large profit. Save receipts and records for all improvements you make to your home, such as landscaping, storm windows, fences and any additions.
You won't be able to deduct these expenses right away. But when you sell your home, the costs of the improvements are added to the purchase price of your home to determine the cost basis on your home, lowering the amount realized on the sale.
Take advantage of energy tax credits. Some energy-saving home improvements to your principal residence can earn you an additional tax break in the form of an energy tax credit. You can get a tax credit for up to 10 percent of the cost up to $500 for qualifying energy-efficient skylights, outside doors and windows, insulation systems and roofs, as well as qualifying central air conditioners, heat pumps, furnaces, water heaters and water boilers.
There is also a completely separate credit equal to 30 percent of the cost of more expensive energy-efficient equipment, including qualifying solar-powered generators, solar energy systems and water heaters. In most cases, there is no dollar cap on this credit.
It's great to have the flexibility to choose your own home and decide what it's going to look like, but it's even better when your decisions end up saving you money in the long run. Knowing these deductions and tax write-offs may give you more peace of mind come tax time and save you more money for your home.