Would you like to take full advantage of your tax savings and still reap the rewards of being a homeowner? Purchasing a home gives you a place to live, and there are possible tax deductions that could result in financial savings of thousands of dollars when tax time rolls around.
To maximize your tax bill, you must be aware of the tax incentives available to homeowners, which range from deducting mortgage interest to claiming property tax deductions. In this article, we will discover how buying a property can help you save money on taxes and open up important savings opportunities.
Important Tax Breaks When Buying a Home
Here is a list of the top 5 tax breaks every home buyer should know before buying a home.
The Deduction for Property Taxes and Mortgage Interest
Two important benefits for homeowners are the mortgage interest deduction and the property tax deduction. In addition to principal and interest payments, the house payment usually covers insurance and property taxes, which are paid to the mortgage holder via an escrow account.
Subject to certain limitations depending on the date of the home's acquisition, homeowners who itemize their deductions can often deduct the mortgage interest paid to the lender. The deduction is limited to the interest paid on the first $750,000 of the mortgage for properties bought after a specific date.
Those who purchased homes prior, are eligible to deduct interest on the first $1 million of their mortgage. The taxes spent on other assets, including cars, land, or holiday houses, may also be deducted from this amount. The primary or secondary home's purchase date and filing status determine the maximum amount of the mortgage interest deduction, which is applicable to mortgage debt used for house construction, improvement, or acquisition.
Credit for Energy-Efficient Residential Properties
Homeowners who install energy-saving upgrades like solar panels, wind turbines, or geothermal heat systems can receive a tax benefit called the Residential Energy Efficient Property Credit. Depending on the particular equipment used, this credit may also be applicable to renovations made to second residences.
The amount of credit varies based on the year the modifications were done, from 22% to 30% of the improvement cost. But the credit is scheduled to expire. Tax credits directly lower the amount of taxes payable, in contrast to tax deductions, which lower taxable income.
Interest Paid on Private Mortgage Insurance is Deductible
Under some circumstances, the premiums for private mortgage insurance (PMI) are deductible. Lenders usually demand PMI in order to guard against default in cases when the down payment on a property is less than twenty percent. Your PMI premiums are deductible if you itemize deductions, and your PMI contract was issued after 2006.
But after your adjusted gross income (AGI) hits $100,000 ($50,000 if you're married and filing separately), the deduction starts to phase out. For every $1,000 you make more than this amount, the deduction is reduced by 10%. If your AGI is greater than $109,000 ($54,500 if married filing separately), the deduction is totally removed.
It's crucial to remember that in order to profit from deducting PMI premiums, property taxes, or mortgage interest, your total itemized deductions must exceed the standard deduction. These costs are not deductible if you choose the standard deduction.
Mortgage Point Deduction
One of the biggest tax benefits for homeowners is the deduction of mortgage points, sometimes referred to as discount points. Usually given to the lender at closing, these points are a proportion of the loan amount. If certain requirements are satisfied, you can often deduct the entire amount of points paid in the year that you purchase a principal residence.
The mortgage must be for your principal property, the points must be within the typical local range, and the points cannot have been used to cover other closing costs like title or appraisal fees. These are some of the requirements. Nevertheless, you are unable to deduct the points in full during the year of payment if you are buying a second residence.
Alternatively, you can gradually deduct them throughout the course of the loan. The same is true if you refinance your mortgage, in which case points are usually subtracted at different rates over the life of the new loan. However, provided you fulfill certain IRS requirements, you might be eligible to deduct the associated points in the year of payment if you utilize a portion of the profits from the refinanced loan to significantly enhance your primary residence.
Deduction for Home Offices
The house office expense deduction offers self-employed individuals who utilize a portion of their house exclusively and on a regular basis for business reasons a considerable tax benefit. Both homeowners and renters are eligible for this deduction, which applies to a wide range of dwellings, including single-family homes, apartments, and even boats. It also includes any outbuildings on the site, like studios or garages.
The specified area of your home must be regularly utilized only for carrying out business-related activities in order to be eligible for the deduction. When this condition is satisfied, you can write off a percentage of several costs associated with your house, such as utilities, insurance, maintenance, rent, and, if you own your property, depreciation.
The "actual expense" technique and the "simplified" method are the two ways to compute the deduction. With the actual expense technique, you calculate the portion of expenses that corresponds to the percentage of your home that is used for business. Although, this approach can be difficult and time-consuming. Alternatively, a deduction of $5 per square foot of home office space may be made using the streamlined approach, with a maximum deduction of 300 square feet.
The Bottom Line!
You can drastically lower your tax burden and boost your savings by utilizing the different tax deductions available to homeowners. You may maximize your investment in homeownership and reap the financial rewards by being aware of and taking advantage of these deductions. Take advantage of these worthwhile tax benefits by beginning your investigation right away and enjoying the advantages of home ownership.
