It’s true that the US tax code is indeed intimidating and because of that, many Americans don’t really want to dig through IRS forms and receipts each spring. The good news is that if you’re the proud owner of a home, then you can take advantage of many deductions that can save you a lot of money in taxes this year. Because of that, it’s certainly not a good idea to let the fear of paperwork intimidate you.
If you’re looking for the best tax breaks, you could easily get the biggest bang for your dollar from your home deductions. If you overlook them, then they may just cost you.
For instance, let’s take the most popular deduction, the interest that you have to pay on your home mortgage. Collectively, US taxpayers get a break of approximately one hundred billion dollars a year from this item alone.
As a homeowner, you certainly have access to such breaks plus many others which can save you a lot of money every year. Here are the 7 biggest ones we think you should know about.
This is the most popular break for taxpayers. So if you have a thirty-year mortgage on a two hundred and fifty thousand dollar home, this is going to result in approximately ten thousand dollars interest payments over the first year. You should also not forget about the condo or vacation home you bought, since you can easily use the interest you paid on those, as well.
Real Estate Taxes
The deduction for local properties is yet another great tax break for Suffolk and Nassau County homeowners and the good news because you live on Long Island, it can be pretty high. In a lot of ways, this tax break is more common than many others, including the mortgage interest deduction. While many people own a property and do not have a mortgage, everyone pays real estate tax.
If you’ve borrowed and do not have twenty percent equity in your home, then you have to get PMI (Private Mortgage Insurance). This is required for the protection of the lender, in case the loan defaults. PMIs usually costs between point five and one percent of the entire loan amount per annum, so if you have a large loan balance, then deducting these payments can add up fast.
When you have 1 point on your home mortgage, that point is valued at one percent of the total loan amount and it has to be paid upfront to the lender in order to minimize your total interest rate. Because of that, many lenders pay points for the purpose of getting a better lending rate and the good news is that they’re also going to get a tax break.
However, it’s only possible to deduct the amount of the points paid in the year you’ve paid them, so if you bought a home in the past year and paid points, then make sure you don’t miss this break.
If your home is damaged by fire or a storm, then you can offset some of the losses thanks to the tax break provided by the IRS. Even if you do have a home insurance policy, you cannot double-dip and get compensated twice for the losses. However, if you have a great insurance policy, you may still receive some tax benefits. You can easily find out how much (if any) of your losses are tax deductible by doing some simple math on Form 4684.
In case you’re self employed and own a home that meets IRS standards, you can take advantage of some pretty great tax benefits. For example, let’s say that your home office represents five percent of your home’s entire square footage. In this case, you’re eligible to deduct five percent off your property’s taxes, insurance, utilities, but also general repairs. Just keep in mind that there are strict rules in place on what constitutes a home office that sees exclusive or regular use. Because of that, you need to speak to your tax consultant or check Publication 587 to verify whether you qualify for this deduction or not.
As a single taxpayer, you can sell your main residence for a two hundred and fifty thousand dollar tax free gain, while if you’re married, then you can do so for double that amount. However, if you managed to maintain accurate records of any capital expenses on your property, then it’s easy to increase the tax free gains beyond those limits. While $500 thousand dollars sounds like a lot of money, over a thirty-year mortgage there can be a major appreciation in your real estate market. As a result, even if this year you won’t actually use the documents from your capital improvements, make sure to keep them until you plan on selling your property.
Residential Energy Credit
When it comes to big ticket systems, such as geothermal heating units and solar panels, you get a thirty percent tax break from the REEPC (Residential Energy Efficient Property Credit). This also includes smaller amounts on items such as water heaters. It’s true that compared to the rest of the breaks, these ones are smaller, but the good news is that they’re a credit and not a reduction.