Being a homeowner comes with a lot of responsibilities, both personally and financially. You have to take care of numerous little things such as mortgage payments, property taxes, maintenance costs, utility bills, and the list is a neverending one. However, the federal government understands the financial burdens of homeowners and hence, it extends a number of tax benefits to homeowners.
If you own a home or are planning to buy one this year, you should definitely be aware of these five tax benefits:
1. Mortgage Interest
For all you homeowners who’re making mortgage payments in installments for your home, you are allowed to deduct the interest on those payments. However, this perk comes with its own limitations:
- If you are married filing jointly, you can deduct the interest on mortgage payments only up to $750 million. Whereas, if you and your spouse are filing separately, each one of you can claim the interests only up to 375,000.
- The mortgage debt must be secured, that is, you must sign either a mortgage agreement/deed or a land contract. And if you’ve sourced the loan from family or friends, they must take the necessary steps to secure the loan on their part, failing which you’ll not be eligible for claiming the deduction on interest payments.
It is important to keep in mind that if you have paid for your house in full, you cannot take an equity loan in the future with your house as a collateral. Also, make sure that while taking the mortgage, your lender provides you with Form 1098 clearly stating the amount of interest you paid for the tax year.
2. Home Equity Loan Interest
Just like mortgage interest, the IRS also allows you to deduct interests paid on home equity loans. The maximum limit, however, cannot exceed $100,000 for married couples filing jointly and $50,000 for married couples filing separately. Also, you must not exceed your home’s fair market value (excluding your outstanding debts against your home).
You can claim the deductions for interests paid on home equity loans in Form 1040 itself.
Of the several ways your mortgage lender can charge you for your home loan, ‘Points’ is one. Even though it is a commonly used form of payment by many mortgage holders, not many are able to fully grasp the point payment method. We’ll put it in simple terms for you – one point is equivalent to 1% of the principal loan amount. If you pay in points while purchasing your home, you can deduct these points in the same year that you paid them. The higher the points you pay, the lower will be your interest rate on a home loan.
Points can be included in and fully deducted from your income tax deductions list (if you pay in points while purchasing a house). In case you want to refinance your mortgage, these points are still completely deductible, provided you deduct them throughout the life of your loan (it cannot be done upfront).
4. Property Taxes
The Tax Cuts and Jobs Act has lowered the annual ceiling for itemizing deductions on property taxes to $10,000. So, now homeowners can only deduct a maximum of $10,000 of their total payments on property taxes as well as state and local income taxes. Both single individuals and married couples are subject to this $10,000 cap. However, you cannot claim this deduction if your money has been put in an escrow account and until your money has been retrieved from that account for paying off your property taxes.
5. Home Office Deduction
If you’ve dedicated a specific portion of your home for your business purposes, the IRS allows you to claim deductions on expenses incurred for running your home office such as insurance electricity, gas, repair & maintenance, water, and other such necessities. You are eligible for the home office deduction if:
- You have a dedicated space within your home that you use as your office, and,
- A specific portion of your home functions as an inventory for your business.
So, next time you’re building up money-saving strategies, make sure you claim these deductions!
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