Year-End Tax Tips for Homeowners
Before the year ends, you might want to spend some time making sure that you’re ready to get full value for tax incentives available to homeowners. You’ll need documentation for the deductions and credits you take, so be sure to collect the paperwork you will need as the year ends.
Mortgage Interest Deduction
This is the biggie for most homeowners. The interest you pay on your mortgage is deductible from your federal and state income taxes. Fixed rate mortgages are structured so that you pay more interest than principal at first. The ratio of interest to principal declines every year and your tax deduction decreases as well. Halfway through your term, you will be paying more principal than interest. Returning to higher mortgage interest deductions is an incentive for some owners to refinance.
Many owners don’t realize the mortgage interest deduction applies to any loan secured by your home in addition to your mortgage, including a second mortgage, a line of credit, or a home equity loan. It also applies to a second or vacation home.
Changes to tax law in 2013 are making the mortgage interest deduction, along with other deductions, less valuable to higher income taxpayers. The amount of itemized deductions claimed by taxpayers is reduced by three percent of the adjusted grow income above $300,000 for couples, and over $250,000 for single filers. The maximum reduction of itemized deductions is set at 80 percent.
Your lender will send you a copy of Form 1098 at the end of the year stating the amount of interest you paid. For more information, see the the Home Mortgage Interest Deduction section of the IRS.
Unless Congress acts before the end of the year, taxpayers who paid mortgage insurance premiums in 2015 will not be able to deduct those payments from their federal income taxes, as they have since 2007.
Last year, Congress passed a one-year extension just two weeks before the end of the year. A repeat is possible but unlikely.
Real Estate Taxes
Property taxes paid to state and local governments can be deducted in the year in which they are paid. If your mortgage lender currently escrows your taxes and insurance, it will send an annual statement to you which you can file with your complete federal tax returns.
Home Improvements and Energy Credits
Certain types of home improvement projects are tax-deductible. Home improvements made for medical reasons, for example, can be tax-deductible. If you are making home renovations to accommodate a chronically ill or disabled person, and the renovations do not add to the overall value of the home, the project costs are typically 100% tax deductible. Repairs and improvements made for aesthetic purposes are not tax-deductible.
You may also qualify for tax credits if you made certain improvements to your home to make it more energy efficient. For 2015 you can qualify for a tax credit worth 30 percent of the cost of alternative energy equipment installed on or in your home. Qualified equipment includes solar hot water heaters, solar electric equipment, wind turbines and fuel cell property. See more information at this IRS Tax Tip to reduce taxes and save more on your energy bills.