Tax Preparation and Home ownership is one of the most rewarding experiences, but it comes with a lot of upfront costs. Luckily, the IRS offers several tax breaks that help make homeownership more cost-effective. To claim these deductions, you must itemize your deductions instead of taking the standard deduction. Common home-related tax deductions include mortgage interest and property taxes; other potential savings could come from private mortgage insurance premiums as well.
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Mortgage interest payments make up an important portion of most monthly homeowner payments and can provide a tax break when itemizing returns instead of taking the standard deduction, offering greater tax breaks overall. Unfortunately, homeowners must take the time and effort to claim this benefit in order to reap its full value. Unfortunately, however, this benefit doesn't happen automatically--they must take the initiative themselves in claiming this deduction! It takes more work, but it will give you bigger tax breaks.
According to the IRS mortgage interest can only be deducted if it was paid to purchase, build or substantially improve your primary or secondary home. This can include refinancing debt secured by either your primary home or second home and home equity loans and lines of credit that serve the same purpose; only interest on improvement-related debt meets certain tests (like adding square footage or changing use).
Mortgage points are upfront fees charged by lenders in order to reduce your interest rates and therefore decrease monthly payments. They can also be deducted on Schedule A, as pre-paid interests. However, they must reduce your effective interest rate by at least 1% to qualify.
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Property taxes are one of the main expenses that come with owning a home. While these taxes may seem costly, they're tax deductible and can help offset some of the high cost of homeownership in certain regions. Homeowners must itemize in order to take advantage of this deduction and exceed their standard deduction amount accordingly.
Homeowners who itemize can also deduct state and local income, property and sales taxes. The combined limit is $10,000 ($5,000 for married filers filing separate returns) of state and local taxes. This does not include transfer taxes or homeowners associations fees, which are typically included in closing costs deductions.
If you use part of your home for business use, such as an office or studio, expenses related to that use could be tax-deductible. This deduction is available for single-family homes, townhouses apartments, condos, co-operative apartments and even mobile and manufactured houses!
Tax deductions may be available for medically necessary home improvements, such as grab bars in the bathroom or wheelchair ramps. You may also benefit from energy efficient upgrades like solar panels or wind turbines; however, in order to take advantage of this deduction you must obtain a letter from your physician certifying the improvement as medically necessary.
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The IRS allows you to deduct certain expenses related to a home office. You can claim the deduction in two ways: regular or simplified. Ultimately, how much of your home is dedicated as an office depends on whether it meets all requirements for deduction (refer to IRS Pub 587: Business Use of Your Home for details).
For a home office to qualify, it must be an area that is exclusively and regularly used for your business or to treat patients or clients. It can be a room, a section within a room, or an outlying structure like a garage, guest house, or shed.
Alternatively, for simpler calculations that don't exceed $300 of expenses you may use the simplified method - just keep receipts for any furniture, appliances or equipment purchased specifically for the office space.
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When purchasing a home with a mortgage loan, the IRS allows you to deduct mortgage points you pay upon closing. Each point usually costs one percent of your loan amount and reduces your interest rate by approximately 0.25 percentage points over its lifecycle. These deductions should typically be spread evenly over the loan term period; however, under certain conditions they can also be deducted all at once in one year.
To take advantage of the mortgage point deduction, it is best to itemize rather than taking the standard deduction. Your lender should send you an annual 1098 statement of mortgage interest detailing the amount of interest tax preparation service paid and any points paid. Box 6 of this document shows that figure. Property taxes paid out of escrow can also be deducted, provided that your municipality accepts this method of paying bills.
Home ownership offers you additional tax breaks. These include energy-efficient credits, deductions for home equity loan used to improve your house and meet certain standards and criteria. To qualify, improvements must meet significant and specific criteria - this could include making it accessible for people with disabilities or grading the ground accordingly.
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