The tax landscape changes yearly. Congress meets occasionally to review and adjust the tax code, so homebuyers must stay on their toes to understand year-to-year tax changes.
The government provides tax breaks for existing and new homeowners to incentivize buying homes. Homeownership offers multiple home tax deductions, tax credits and other breaks that aren’t available to those who rent. If you bought your first home in 2016 — or you’re hoping to buy one in 2017 — it can pay to familiarize yourself with first-time homebuyer tax credits so you can take advantage of tax breaks that lower your tax bill.
Home Mortgage Interest Deduction
The mortgage interest deduction is one of the biggest home tax breaks and is a crucial new homeowner tax credit. It covers interest paid on loans of up to $1 million, or $500,000 if you’re married but filing a separate return.
The deduction can be especially beneficial for borrowers with new loans because interest charges on mortgages are typically steeper in the early years of the mortgage’s term.
You must itemize on Schedule A of your tax return to claim the home mortgage interest deduction. To do so, add up all deductible expenses for the year, including those related to homeownership as well as other categories. Claiming the mortgage interest deduction can save you tax dollars if your itemized deductions are greater than your standard deduction.
Don’t miss this new homebuyer tax credit. Your loan provider should send you Form 1098 shortly after the tax year ends. It will show the amount of interest you paid the previous year.
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Mortgage Interest Credit
The federal government’s mortgage interest credit provides another opportunity for first-time homebuyers to claim a tax break for the mortgage interest they paid. Unlike the mortgage interest deduction — which reduces your taxable income — this mortgage interest credit directly counts against your tax bill, lowering what you owe.
For example, imagine you prepare a return and find that you owe the IRS $1,000 in taxes. However, completing IRS Form 8396 for the mortgage interest credit shows that you’re eligible for a $1,000 credit. In that situation, you can apply the credit and not owe the IRS anything.
The credit is not refundable, so you won’t receive a check if the credit is larger than what you owe in taxes.
To be eligible for this strategic tax break, a state or local government must have issued you a Mortgage Credit Certificate. Typically, this certificate is issued at the time you originate the mortgage. The certificate tells you how much interest you can claim as a credit. If you also claim a mortgage interest deduction when you file your taxes, you must reduce the credit by that amount — no double-dipping is allowed.
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Mortgage Points Deduction
You can also deduct what you pay in points to obtain the mortgage loan in the first place. Mortgage points are prepaid interest that can help a borrower qualify for a lower interest rate over the life of the loan. And, they can qualify for a tax deduction as well.
You must itemize on your return to claim this deduction, and your settlement disclosure statement must specifically cite these fees as “points.” Your home loan must be for $1 million or less, just as with the mortgage interest deduction.
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Tax-Free IRA Withdrawals
Saving money for a down payment and closing costs is a major consideration for most people when they’re getting ready to buy a home. The IRS says you can pull funds from your IRA to help.
You can take up to $10,000 from your IRA without penalty to buy a home, although you’ll still need to pay taxes on the money. Your 401k plan does not qualify for the exception to the 10 percent penalty.
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Property Tax Deduction
Property taxes are one of the many lucrative tax breaks for first-time homebuyers. Taxpayers who itemize deductions on Schedule A are also eligible to deduct real estate taxes paid on a primary residence.
You can deduct property taxes paid during the year for which you’re filing. If you purchase a home midway through the tax year, you can claim all taxes paid from the date of sale onward.
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Home Improvement Tax Breaks
Improvements you make to a home can qualify for a tax break. If you use a home equity loan or other loan secured by your home to finance improvements, the loan will qualify for the same mortgage interest deductions as your main mortgage.
Keeping track of capital improvements to the home also can help you out when you sell the home. If your home sells for more than you paid for it – your tax or cost basis — that extra money can be considered taxable income at capital gains rates subject to certain thresholds and rules. But home improvements can lower your taxes by increasing your tax basis.
“You can include the cost of improvements made to the property in the cost basis of the property when you’re determining any capital gains on the sale,” Christakos said. “Make sure you keep your receipts for major improvements so you can prove the costs you claim.”
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Home Energy Tax Credits
The federal solar tax credit, also known as the investment tax credit (ITC), allows you to deduct 30 percent of the cost of installing a solar energy system from your federal taxes. This will change in the coming years, though, thanks to the spending bill that Congress passed in late December 2015. Here are the specifics:
- 2016 – 2019: The tax credit remains at 30 percent of the cost of the system. This means that in 2017, you can still get a major discounted price for your solar panel system.
- 2020: Owners of new residential and commercial solar can deduct 26 percent of the cost of the system from their taxes.
- 2021: Owners of new residential and commercial solar can deduct 22 percent of the cost of the system from their taxes.
- 2022 onwards: Owners of new commercial solar energy systems can deduct 10 percent of the cost of the system from their taxes. There is no federal credit for residential solar energy systems.
If you are in the market to purchase a home and want reap these tax benefits, give me a call, let’s go over your options!
Information sourced by: gobankingrates.com/news.energysage.com