It’s almost that time of year – Tax time! Homeownership offers multiple tax 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 (real dollars!) to familiarize yourself with the tax benefits.
Keep in mind:
You may be able to deduct mortgage interest on your primary residence as well as on a second home. This deduction can be especially beneficial for borrowers with new loans because interest charges on mortgages are typically steeper in the early years of the loan term. You can claim the deduction if your itemized deductions are greater than your standard deduction. You may also be able to deduct the interest on up to $100,000 on a home equity loan or home equity line of credit, regardless of the reason for the loan.
Some first time home buyers may be eligible for a mortgage interest tax credit. While the mortgage interest deduction reduces your taxable income, the mortgage interest credit directly counts against your tax bill, lowering what you owe. However, you will not receive it as a refund if the credit is larger than what you owe. If you also claim the mortgage interest deduction, you must reduce the credit by that amount.
You may be able to deduct the amount you paid for mortgage insurance (for policies issued after 2006) depending upon your income.
You may be able to deduct what you paid in points to obtain your mortgage loan. Keep this in mind when you’re buying a home because the benefits are twofold – The points lower the interest rate on your loan, plus it’s deductible. Your mortgage settlement disclosure statement must cite the fee as “points.”
Homeowners who itemize deductions may deduct real estate taxes paid on a primary residence. If you purchase a home midway through the tax year, you can claim all taxes paid from the date of sale onward. Don’t forget to include any taxes you may have reimbursed the seller for. These are taxes the seller had already paid before you took ownership. You won’t get a 1098 report listing these taxes. Instead, that amount will be shown on your settlement sheet.
Saving money for a down payment and closing costs is hard! It’s often a major hurdle for many people who want to buy a home. So the IRS enables most first time homebuyers to take up to $10,000 from their IRA funds without paying the 10 percent penalty normally applied to withdrawals taken before age 59½. You’ll still need to pay taxes on the money withdrawn. And your 401k plan does not qualify for the exception.
If death and taxes are the two things you can always count on in life be sure to consult your financial advisor or tax preparer to take advantage of all the homeowner tax breaks you’re entitled to. If you don’t have a financial advisor, I’ll be happy to recommend someone. Call me at (719) 447-7915.Questions? Contact The Shane Ray Team Today!