7 Important Tax Deductions for Homeowners to Know
Are you claiming every tax deduction possible for your home? Chances are, you’re not. Year after year, homeowners miss tax deductions they could have claimed, and when you consider the cost of owning a home, nothing is worse than paying more than necessary in taxes.
Of course, home tax deduction confusion strikes new homeowners the most often, but even seasoned home buyers can use a review of what to deduct. All it takes is a knowledgeable accountant and some research to help both new and longtime homeowners make the most of their tax deductions.
Here are some home deductions to consider:
1. Mortgage Interest
All your mortgage interest is deductible, unless your loan is for more than one million dollars or for a third or fourth house. Because mortgage interest is the interest you pay on a loan you obtained to buy a home, it also pertains to a second mortgage, a line of credit, and a home equity loan. The home you mortgaged could be a house, condo, mobile home, boat or RV as long as there are sleeping, cooking, and bathroom facilities.
To take this mortgage interest deduction and others like it, homeowners must itemize deductions on their tax returns.
2. Home Purchase and Refinancing Points
Although mortgage interest deductions are common, many homeowners may be unaware that refinancing also qualifies. Here, homeowners deduct points paid on a home purchase or refinance over the life of the loan. It’s key to remember that one point equals one percent of the loan, so a one percent fee on $100,000 would be one point, or $1,000. For a home purchase loan, you can deduct all the points paid in the year. For a home refinancing, points must be deducted over the life of the loan.
If unamortized points from a previous refinancing are deducted in the year of a new refinancing, deduct all the remaining points on the previous year’s loan on your current tax return.
3. Property Taxes
New homeowners can deduct any property taxes reimbursed to the seller upon home purchase, so remember to include the property taxes paid in advance on your tax paperwork. These property taxes are usually listed on your home’s settlement or closing statement.
All homeowners can deduct property taxes for as long as they own their home.
Only deduct the property tax amount paid to the local municipality qualifies, so be sure to check that other city or county fees aren’t included when you deduct.
4. Energy-efficient Upgrades
Homeowners can also often deduct the cost of building materials used to make energy-efficient upgrades to their home. This deduction is actually a tax credit, which is a dollar-for-dollar reduction in your tax. This deduction applies to doors and windows, central air, skylights, furnaces, water heaters and more.
In this scenario, ten percent of the total bill for energy-efficient materials such as insulation, roofs, and doors can be used as a tax credit, up to a maximum of $500. Furnaces, windows, and air conditioners qualify for individual limits, so check the IRS website for 2014’s guidelines.
Energy-Star-rated appliances may also qualify for deductions. Check the list of appliances at the Energy Star website.
5. Home Office
Homeowners can deduct a home office if the area is used exclusively and on a regular basis for business purposes. In most cases, the deduction is $5 per each square foot used as an office, not to exceed 300 square feet.
According to the Small Business Administration, the average home office deduction is $3,686. It’s important to note that the space you designate as your home office cannot be exempted from capital gains tax when you sell your home later. If you think you’ll sell your home for much more than you bought it, talk to your tax person to see if the money you save is worth the capital gains issue later.
Other than capital gains complications, the most common reason for not taking a home office deduction is the extra paperwork that requires taxpayers to itemize expenses such as rent, utilities, insurance, and mortgage interest and determine whether they are direct or indirect expenses, and then allocate a proportional share of each to the office.
Because home office deductions can be every changing, be sure to consult the IRS guidance and your tax accountant for the latest allowances and restrictions.
6. Home Improvement Loan Interest
Homeowners who have taken out home improvement loans may be able to deduct the interest on the loan. Qualifying deductions include for loans taken out for capital improvements, otherwise known as improvements that increase your home’s value. Capital improvements also include those made to adapt your home to new uses or prolong its life. Building a deck is a capital improvement, a paint job is not.
7. Construction Loan Interest
If you’re building a new home and take out a construction loan to finance it, you might be able to deduct the loan’s interest. Qualifying home construction loans must be for your principal residence or for a vacation home used for personal purposes. This deduction applies for the initial 24 months of the loan.
don’t forget to include work-related moving expenses, landlord deductions (you can write off mortgage interest, depreciation, property taxes, maintenance costs, and property management costs) – See more at: http://gregwelchconstruction.com/tax-deductions-for-home-owners-you-may-have-missed/#sthash.asV4SyJV.dpuf
Tax time isn’t fun, but taking advantage of extra deductions you weren’t expecting makes the process a tiny bit better. In addition to the above, other deductions include work-related moving expenses, deductions you can take as a landlord such as depreciation and maintenance costs.
The best way to keep on top of the newest allowances and requirements for homeowner tax deductions is to consult the IRS website. Also, don’t forget that to deduct the expenses of owning a home, you must file Form 1040, U.S. Individual Income Tax Return, and itemize your deductions on Schedule A (Form 1040). If you itemize, you cannot take the standard deduction. What deductions didn’t we cover that you use?
Disclaimer: This post is not intended as tax advice and should not be used by taxpayers for the purpose of avoiding penalties that may be imposed by law. Taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax adviser.