With tax day just around the corner, many taxpayers will soon scramble to get their documents organized in order to take full advantage of all the tax breaks available to them. Of these taxpayers, homeowners have a lot to gain but to getting the tax help they need, will mean preparing the dreaded and often confusing itemized deductions. A Fox Business Article entitled Six Tax Breaks Every Homeowner Should Know suggests that homeowners look past the complex IRS deductions and take full advantage of all the tax breaks they can. Homeowner tax deductions are financially smart and likely result in more money the taxpayer gets to keep.
Here are the six most important tax breaks a homeowner should not miss out on:
Mortgage Interest Deduction
Most homeowners take this deduction, because it offers provides the most tax relief and significant savings. The majority of monthly mortgage payments go toward loan interest, so you are able to deduct all the interest paid on your taxes. Homeowners are advised to keep Form 1098 issued from the lender close by as it explains exactly how much can be deducted and provides proof should there be an IRS audit.
Mortgage Insurance Premiums
Many homeowners have private mortgage insurance (PMI) which protects the lender from default on the loan. If you have more than 20% equity in your home, you are not required to have PMI. If you have reached the 20% or more equity mark and your adjusted gross income (AGI) is less than $100,000 (or $50,000, if married filing separately), you could be entitled to take a deduction on the amount you paid. The deduction is either reduced or eliminated if your income level surpasses that and goes away altogether if the AGI is $109,000 or more ($54,500, if married filing separately).
Homeowners can take advantage of tax breaks that benefit the installation of energy efficient doors, windows and skylights. To qualify for the deduction, the following criteria must be met:
- Deductions must be taken by the end of the year.
- It must pertain to a primary residence.
- They must follow Energy Star program requirements.
If qualified, a homeowner could receive a tax credit equal to 10% of the cost of the products. Deduction limits for the products are capped; doors at $500, windows and skylights at $200 but installation costs are not deductible. Since IRS rules for documentation are vague, it is wise to keep any receipts and Energy Star documentation for any and all qualified improvements.
The IRS defines points as certain charges paid to obtain a home mortgage. Points are prepaid interest and may be deductible as home mortgage interest, if deductions are itemized. If this is your first mortgage you can deduct them in the year they were paid, making sure they are for your primary residence and you didn’t pay excessive points. If you have refinanced, you are able to deduct points over the life of the loan. A certified tax professional or CPA will be able to assist you with the details if you qualify.
Based on the assessed value of the real property, you are allowed to deduct state and local property taxes. If your property taxes are paid out-of-pocket, you will need to use previous property tax bills to determine how much you have paid. If you are one of the homeowners who pays through an escrow account, the information appears on Form 1098.
Construction Loan Interest
If you have taken out a construction loan specific to building a home, you may be entitled to deduct the interest. However, the deduction only lasts for the first 24 months of the loan, even if the construction carries on for a longer period of time.
If trying to figure homeowner tax deductions on your own, you will most likely encounter technical restrictions and confusing guidelines. It’s best to consult a tax expert who may be able find more deductions than you are aware of. More importantly, they can help you avoid creating any IRS tax issues in the first place.
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