Taxes change drastically when you become a homeowner. Most importantly, there are a plethora of tax deductions that open up to you. In most cases, you need to itemize your taxes in order to take advantage of all the homeowner tax breaks.
This can seem overwhelming but once you get the hang of it – and your sizable tax return – it will all be worth it. If you bought a home this year or just want to learn more about what real estate costs you can deduct from your taxes, then take a look at where you can get some money back this year. Here’s some tips on getting a grip on tax deductions.
House Payment
If you took out a mortgage to finance your home, you make monthly payments. You can’t deduct all of your costs, however there are several components of your house payment that you can deduct.
- Property Taxes – Taxes paid to the taxing authority are deductible. Usually these are paid monthly as a part of your mortgage payments so you can find the info you need on the annual statement from your lender. Although they may not be deductible by the state, these real estate taxes can be deducted on federal returns.
- Home mortgage interest – This is the biggest and most common deduction that homeowners claim on their taxes. Most homeowners can deduct all of their home mortgage interest. How much you can deduct depends on when you took out your mortgage, the amount and how you use mortgage proceeds.
- Mortgage insurance premiums – The ability to deduct private mortgage insurance (PMI) for mortgages taken out on primary residences in 2007 or later was extended one more year for homeowners who meet income limits. Not to be mistaken with homeowners insurance, which protects you from fire and other loss, PMI is what homeowners pay monthly on mortgage loans that are high risk (think low down payment).
- Taxes paid at closing – If you bought a home in 2014, then all those taxes you paid at closing can be deducted from your taxes. Your share of these taxes is fully deductible if you itemize your deductions. Taxes are generally divided between the buyer and seller at closing as part of the property tax year. Your share of these taxes is fully deductible if you itemize your deductions.
Points
If you paid points to get a better mortgage rate on your home loan in 2014, there’s a tax break you can claim.
The IRS lets you deduct points in the year you paid them if the loan is to purchase or build your primary residence, paying points is an established local business practice and the points were within the common range. Also, if you refinance your home, these points are still deductible but it must be done over the life of the mortgage.
Energy-savings
If you made any eligible improvements in 2014, such as installing energy-efficient windows and doors, you may be able to take a 10% tax credit (up to $500; with some systems your cap may be lower).
However, keep in mind this is a lifetime credit. If you claim up to the $500 cap this year you won’t be able to deduct other energy efficient installations in the future.
Home office deduction
Announced last year, there is actually a “safe harbor” rule that allows taxpayers the option of taking a deduction of $5 per square foot for the part of the home dedicated to home office or business use. Taxpayers can apply this simplified method for up to 300 square feet of home office and storage space devoted to business use – which adds up to a deduction of up to $1,500 per year.
Home improvements
If you made home improvements and renovations for medical reasons, they may be tax deductible. For example if you remodeled to make your home more accommodating for a chronically ill or disabled person, and the renovations don’t add to the value of your home, the project costs are usually 100% tax deductible.
If you have more questions about available tax deductions as a homeowner or need help itemizing your taxes, don’t hesitate to contact a licensed accountant.
Thank you for reading. I hope you found this information useful.
Jeff Pittman, Realtor in Ladera Ranch – Orange County, California