A home might be an expensive purchase, but owning your home has several benefits over renting.
For one thing, you no longer have to worry about paying rent to a landlord or about the cost of rent going up each year. For another, you’re free to do what you want to or in the home, from painting the walls vivid colors to carpeting the floors. Several tax breaks for homeowners also sweeten the deal. Whether you just purchased your first home or have owned for years, it’s a good idea to make sure you’re claiming the tax deductions you’re eligible for.
First Things First. …
Tax breaks for homeowners don’t magically appear. You need to file the appropriate tax return forms to claim them. If you filed Form 1040EZ or 1040A in the past, it’s time to upgrade to Form 1040. Instead of taking the standard deduction, you also need to start itemizing and complete Schedule A to claim all the tax breaks due to you. While plenty of people are able to claim a larger deduction when they itemize, that’s not always the case. Be sure to compare the total amount of your itemized deductions to the amount of the standard deduction and pick the one that ends up reducing your income the most.
1. Mortgage Interest
If you have a mortgage on your home, one of the tax breaks you get is the ability to deduct the amount of interest you pay on the loan from your income. You can deduct the interest you pay as long as your mortgage is less than $1 million and as long as you took out the loan to buy or fix up your home. People who own multiple homes are able to deduct the mortgage interest from each loan, as long as they spend at least two weeks a year living in each home.
2. Property Taxes
Paying property tax or real estate tax usually goes along with owning a home. How much you have to pay depends on the tax rate where you live and the value of your property. The good news is that you can deduct the amount you pay in real estate tax from your income.
Things can get a little more interesting when it comes to real estate taxes and tax breaks the year you purchase your home. If you owned the home for less than a full year, you can deduct a prorated amount of taxes from your income, even if the previous seller ended up paying the full amount of the real estate tax before you purchased the home and even if you wound up paying no taxes your first part year of owning the home, according to the IRS’ rules.
3. Mortgage Insurance Premiums
Putting less than 20 percent down on a home typically means you need to purchase mortgage insurance. While the cost of premiums does add to your monthly payment, you can deduct the amount you pay in premiums on your tax return. To get the deduction, you need to have private mortgage insurance or insurance from a federal agency, such as the Federal Housing Administration or the Veterans Administration.
Tax breaks for homeowners are designed to sweeten the deal when it comes to buying a home. When you file your tax return this year, make the most of your deductions by including those associated with owning your own home.
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