Homeownership Equals Tax Deductions
One of the best (and least talked about) advantages of owning a home are the tax benefits. While some may know that there are advantages, many people are uncertain about what they are and how they work. In short, homeownership equates to tax deductions and increased tax deductions equals less taxes owed. These tax benefits can result in huge savings and increase the average person’s tax return by hundreds or even thousands of dollars. Here are a few of the ways that taxpayers benefit from owning a home.
Potentially the largest tax deduction available exclusively for homeowners is the amount paid annually in mortgage interest. Every month’s mortgage payment is going towards principal, interest, taxes, and insurance. Most first time homeowners are very surprised at the percentage of each payment that actually goes towards the principal balance — it’s a huge chunk. Each year, your loan holder will send a tax statement (IRS 1098) that calculates your year-end total. The entire amount can be deducted.
Also on the IRS 1098 form will be a year-end total for how much was paid in property taxes. All of this amount can be deducted from your taxes as well. Each month a portion of your mortgage payment will be held in escrow so that your lender can pay taxes on your behalf annually. Since property taxes fluctuate each year it’s important to note that it’s not the amount that you pay into the escrow for taxes but rather the amount that has been paid out of escrow. The IRS 1098 will clearly state the total amount.
Mortgage Insurance and Discount Point Affect Your Tax Return
Depending on what loan type you have, there’s also the opportunity to deduct any money paid towards mortgage insurance premiums. Most borrowers who put down less than 20% at closing pay monthly mortgage insurance (PMI or MI.) In most cases this amount can be deducted, and the total amount paid for the year can also be found on the IRS 1098 form. On top of monthly mortgage payments, you may be able to deduct any upfront premium charges that you paid at closing. A copy of your HUD1 statement or Closing Disclosure should be able to document amounts paid.
Another way you may qualify for a tax deduction is if you paid money towards discount points at your closing. Discount points are a percentage of the purchase price paid to the lender to help lower interest rates. The amount of the discount points needs to be equal to or lesser than the amount of cash applied towards the transaction by the buyer, but you may still be able to deduct the amount of discount points even if they were paid by the seller. There are several qualifying parameters on if and how you can deduct these amounts, so be sure to consult with a tax professional.
Take Advantage Of The American Dream
The government offers great incentives for fulfilling the American dream and buying a home, including offering some amazing tax benefits to taxpayers. Prior to owning a home of your own you may not even realize the magnitude of these savings–they could lead to a tax return that equates to several months worth of mortgage payments. It is well worth taking the time to itemize tax deductions for interest, property taxes, mortgage insurance, and discount points. Another great option is to adjust your tax withholding to increase your monthly pay and put more cash at your disposal. Either way, homeownership can leads to some fantastic tax savings!
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