Tax Break For Buying A Home
Did you know that you can get a tax break for buying a house, as well as for many of the ongoing expenses of homeownership? You could stand to save thousands of dollars at tax time, but first you have to know which of your expenses qualify and whether you want to itemize your deductions or take the standard deduction.
tax break for buying a home
Download File: https://www.google.com/url?q=https%3A%2F%2Fvittuv.com%2F2ugMVS&sa=D&sntz=1&usg=AOvVaw3A3i_kTUUPikPeI9zvPvZV
To take advantage of tax deductions, you need to research and identify which deductions apply to you before filing your taxes. The available tax deductions can change each year, as can your financial situation, however some homeownership expenses are simply not going to be deductible.
Another one of the tax benefits of buying a home is the ability to deduct mortgage points you paid upfront when closing on your home purchase. One mortgage point, sometimes called a discount point, is equal to 1% of your loan amount.
If you install refueling infrastructure for an alternative-fuel vehicle at your home, you may be able to recoup $1,000 or 30% of the installation cost (whichever is lower) by claiming the Alternative Fuel Vehicle Refueling Property Credit.
If you work from home or have a home-based business, you may qualify for the Home Office Deduction, which applies to both homeowners and renters. To qualify, a portion of your home (a bedroom-turned-office, for example) must be used exclusively and regularly for business purposes. You must also show that your home is the main location used to conduct your business.
Buying a home is when you begin building equity in an investment instead of paying rent. And Uncle Sam is there to help ease the pain of high mortgage payments. The tax deductions now available to you as a homeowner will reduce your tax bill substantially.
If you have been claiming the standard deduction up until now, the extra write-offs from owning a home almost certainly will make you an itemizer. Suddenly, the state taxes you pay and your charitable donations will earn you tax-saving deductions, too. So make sure you know about all these breaks that may now be available to you.
For most people, the biggest tax break from owning a home comes from deducting mortgage interest. For tax years prior to 2018, you can deduct interest on up to $1 million of debt used to buy, build or improve your home.
For tax years after 2017, the limit is reduced to $750,000 of debt for binding contracts or loans originated after December 16, 2017. For loans prior to this date, the limit is $1 million. Your lender will send you Form 1098 in January listing the mortgage interest you paid during the previous year. That is the amount that you can typically deduct on Schedule A. Be sure the 1098 includes any interest you paid from the date you closed on the home to the end of that month. This amount should be listed on your settlement sheet for the home purchase. You can deduct it even if the lender does not include it on the 1098. If you are in the 25% tax bracket, deducting the interest basically means Uncle Sam is paying up to 25% of it for you.
When you buy a house, you may have to pay "points" to the lender in order to get your mortgage. This charge is usually expressed as a percentage of the loan amount. If the loan is secured by your home and the amount of points you pay is typical for your area, the points are deductible as interest as long as the cash you paid at closing via your down payment is equal to or greater than the points.
In the year you purchased your residence, you probably reimbursed the seller for real estate taxes they had prepaid for time after you purchased the home. If so, that amount will be shown on your settlement sheet. Include this amount in your real estate tax deduction. Note that you can't deduct the monthly payments into your escrow account as real estate taxes. Your deposits are simply money put aside to cover future tax payments. You can deduct only the actual real estate tax amounts paid out of the account during the year.
Buyers who make a down payment of less than 20% of a home's cost usually get stuck paying premiums for Mortgage Insurance, which is an extra fee that protects the lender if the borrower fails to repay the loan. For mortgages issued in 2007 or after, home buyers can typically deduct premiums. This deduction has been extended through 2021 but has not yet been extended through 2022.
As a further incentive to homebuyers, the normal 10% penalty for pre-age 59 withdrawals from traditional IRAs does not apply to first-time home buyers who break into their IRAs to come up with the down payment.
But get this: You don't really have to be a first-time homebuyer to qualify. You're considered a first-timer as long as you haven't owned a home for two years. Sounds great, but there's a serious downside.
You can't deduct these expenses now, but when you sell your home the cost of the improvements is added to the purchase price of your home to determine the cost basis in your home for tax purposes. Although most home-sale profit is now tax-free, it's possible for the IRS to tax you on the profit when you sell. Keeping track of your basis will help limit the potential tax bill.
Some energy-saving home improvements to your principal residence can earn you an additional tax break in the form of an energy tax credit worth up to $500. A tax credit is more valuable than a tax deduction because a credit reduces your tax bill dollar-for-dollar while a deduction lowers the amount of income that is taxed.
Another major benefit of owning a home is that the tax law allows you to shelter a large amount of profit from tax if certain conditions are met. If you are single and you owned and lived in the house for at least two of the five years before the sale, then up to $250,000 of profit is tax-free. If you're married and file a joint return, up to $500,000 of the profit is tax-free if one spouse (or both) owned the house as a primary home for two of the five years before the sale, and both spouses lived there for two of the five years before the sale.
You can use this exclusion more than once. In fact, you can use it every time you sell a primary home, as long as you owned and lived in it for two of the five years leading up to the sale and have not used the exclusion for another home in the last two years. If your profit exceeds the $250,000/$500,000 limit, the excess is reported as a capital gain on Schedule D.
In certain cases, you can treat part or all of your profit as tax-free even if you don't pass the two-out-of-five-year tests. A partial exclusion is available if you sell your home "early" because of a change of employment, a change of health, or because of other unforeseen circumstances, such as a divorce or multiple births from a single pregnancy.
If your new home will increase the size of your mortgage interest deduction or make you an itemizer for the first time, you don't have to wait until you file your tax return to see the savings. You can start collecting the savings right away by adjusting your federal income tax withholding at work, which will boost your take-home pay. Get a W-4 form and its instructions from your employer or go to www.irs.gov.
Before we dive into the deductions available for homeowners, it is essential to understand the difference between standard and itemized deductions. Both types of deductions can lower your overall income tax burden by reducing your taxable income.
With the standard deduction, you can reduce your taxable income by a standard amount. When you itemize deductions, including tax breaks for homeowners, you forgo the standard deduction. Instead, the total amount of the itemized deductions will offset your taxable income and lower your tax burden.
If you are considering taking advantage of tax deductions for homeowners, then make sure that the total amount of your itemized deductions is larger than the standard deduction. Otherwise, it makes more financial sense to take advantage of the standard deduction to keep your tax liabilities as low as possible.
Once you start to explore the deductible expenses available, you may want to expand your deductions to encompass any number of home expenses. That said, you should be aware of some nondeductible home expenses, including:
In the past, homeowners could deduct up to $1 million in mortgage interest. However, the Tax Cuts and Jobs Act has reduced this limit to $750,000 as a single filer or married couple filing jointly. If you are married but filing separately, the deduction limit is $375,000 for each party.
However, if you have to make permanent improvements to make your home more accessible for medical reasons, that should qualify. A few examples might include installing medical equipment, installing railings or widening doorways for an accessible home.
If you operate a business in your residence, you may be deduct some of the expenses of maintaining that space. The IRS requires that you use your home office for regular and exclusive business use in order to qualify for a deduction. If you only use the office space when it is convenient, or just for working from home for your employer, that will not qualify.
Private mortgage insurance, or PMI, is another expense that many homeowners must factor into their budget. PMI is there to protect your lender if you are unable to continue making payments on your mortgage.
If you were using the home as your primary residence for 2 of the last 5 years, you could keep some profits without any tax obligation. As a married couple filing jointly, you can keep up to $500,000 in capital gains. As a single filer or married couple filing separately, each party can keep up to $250,000 of capital gains without a tax obligation.
Fortunately, Uncle Sam has a few tax tricks up his sleeve to help you buy a home, save on home-related costs and sell your home tax-free. Some of them are complicated, limited or come with hoops you have to jump through, but they can be well worth the trouble if you qualify. And if your budget is already stretched thin, you need all the help you can get. So, without further ado, here are 13 tax breaks that can help you buy a home and prosper as a homeowner. 041b061a72