How Home Owners Can Get Maximum Tax Returns.
Own a house. Ask homeowners what’s so great about owning versus renting, and most will answer “tax reduction!” That’s true because all homeowners who itemize their taxes can deduct 100% of mortgage interest and property taxes from their income tax returns. But how do you get the maximum tax return for homeowners? If you don’t own a home, there may be good reasons, but the benefits of owning a home far outweigh renting. There are really only two reasons not to own a home—you can live rent-free with your parents or friends or maybe you plan to move in 3 years or less. Even if you are single, but plan to live in the area for more than 3 years, consider buying a house.
The main tax incentive for owning a home is that it allows you to deduct the interest you pay on your mortgage. This is usually the biggest tax deduction for most people, as a large portion of your home payment goes towards interest during the early years of the mortgage. The main advantage of being a homeowner during tax season?
Deductible mortgage interest includes “points” when you buy your home.
Property tax is deductible on your return.
A deduction for repairs made to your home when you sell.
Tax-free capital gains of up to $500,000 when you sell your home.
To get the maximum tax return for homeowners, you must use Form 1040 and itemize your deductions. If you’re in the 28% tax bracket, the government effectively subsidizes about a third of the cost of your loan, making your home more affordable. Also, your closing costs and points are tax deductible, and hundreds of thousands of dollars of any capital gain gains you realize when you sell your home are exempt from income tax.
At tax time, it’s important to know what you’re entitled to, so you can claim it. So, here are five essential tax tips for getting the maximum tax return for homeowners.
1. Fill out long forms at least once and learn how to detail your pieces.
Nearly 40% of homeowners lose their number one tax advantage each year when they fail to itemize their income taxes. If you own a home and otherwise have a fairly modest return, it may be tempting to take the standard deduction or file a Form 1040A. In some cases where your mortgage, property taxes, and income are fairly low, the standard deduction may be a larger deduction than your itemized deduction. But you’ll never know unless you fill out both forms at least once.
So before you start filling out Forms 1040A or 1040EZ, gather your paperwork and answer questions on tax software like TurboTax, which will automatically calculate whether itemizing or taking standard deductions will result in the lowest tax bill.
Why extra work? You can only pay less in taxes, never more by filling out the longer Form 1040.
2. Reduction of home office.
The average home office deduction is over $3,000. Of course there are specific IRS rules about what you can claim as a home office. The space you claim as your home office cannot be exempt from capital gains tax when you sell your home. Visit the IRS.gov website for full details.
3. tax breaks for loan modifications, foreclosures and short sales.
The Making Home Affordable ® (MHA) ® program is a key part of the Obama Administration’s comprehensive plan to stabilize the US housing market by helping homeowners get mortgage relief and avoid foreclosure. To meet the diverse needs of homeowners across the country, the Making Home Affordable ® program offers a variety of solutions that might help you take action before it’s too late. You may be able to refinance and take advantage of today’s low mortgage interest rates and reduce your monthly mortgage payments.
While long-term housing prospects began to improve in 2011, loan modifications are projected to peak this year. Distressed homeowners who are on the verge of a short sale, loan modification or foreclosure should be aware that typically, any mortgage balance written off by one of these proceeds is taxed as the IRS calls a Debt Income Cancellation, or CODI.
Under the Mortgage Debt Forgiveness Act of 2007, the IRS currently does not charge income taxes on CODIs issued through loan modifications, short sales or foreclosures in most residences until 2012. years to complete. new mortgage. If you see any of this happening in your future, don’t delay. Get free advice from housing experts at MakingHomeAffordable.Gov. or call 888-995-HOPE (4673) to speak to an expert.
4. Tax consequences of refinancing or appeals property taxes.
Homeowners everywhere are working to file lower property tax bills based on the decline in the value of their homes in recent years. Those with equity have tried to refinance their existing home loans to rates of 4% to 5% in recent years. This strategy offers some of the biggest savings to date. But here’s a small warning for homeowners who can afford to cut these costs. Property taxes and mortgage interest, the costs you will minimize the most, are also the basis of the main tax benefits of being a homeowner. So plan ahead for your tax deductions to come down along with your taxes and interest.
5. Don’t forget closing costs.
If you are buying or refinancing your home, you may focus on mortgage interest and property tax deductions so that you forget about all your closing costs. Keep in mind that any origination fees or discount points paid to your mortgage lender at closing are tax deductible on your return. When you finance a house, you can pay out what are called “points”. Points lower your mortgage interest rate by effectively prepaying a portion of the interest at closing. Points are paid by the borrower to the lender as part of the loan agreement, and it is a percentage of the loan. Points can also be called loan origination fees, maximum borrowing fees, loan discounts or discount points. If you don’t know exactly what you paid for, look up your HUD-1 settlement report. This is full of credit and debit line items that you should have received from your escrow provider or attorney at closing.
Helpful Hints: There are two things you can count on when you’re a homeowner: You get more tax breaks, and your taxes get more complicated. Whether you have purchased a single-family home, townhouse or condo, tax breaks are at your disposal. It’s time to familiarize yourself with the tax forms because that’s where you’ll need to provide all the details about your new tax-deductible expenses.
Don’t forget the PMI premium on your tax return. PMI is the private mortgage insurance premium on a particular mortgage. If you make a down payment of less than 20%, you are usually required to carry personal mortgage insurance. This type of insurance is paid for by the buyer but protects the lender if the borrower stops paying the loan. PMI premiums are deductible if the mortgage is issued after 2006. This deduction is subject to change in 2012 so check the IRS website for up-to-date information.
Final Thoughts: There are also huge tax savings on profits when you sell. If you’re going to be living in your home for at least 5 years, consider buying a home just for this reason. When you sell your home, the amount of your profit from the sale is tax-free if you meet the criteria. If you are married, you can earn up to $500,000 from the sale, and you don’t have to pay taxes on that income. If you are single, you can earn up to $250,000 in profits without paying federal taxes. There’s only one catch: You must own and occupy your home for at least two of the last five years. Visit IRS.gov for more information.
