Home Loan Tax Benefits
Making a purchase of anything comes with some attached taxes. If you are buying a home, this applies too. Yet, you can gain some tax benefits that allow you to save on the overall cost.
The point is, you no longer have to worry about the probability of your house price going higher because of associated taxes. Depending on various factors, you stand to benefit a lot from tax deductions. They come in various forms as explained below. Keep reading.
Tax Benefits You Should Know About
Tax deductions adjust your gross income downwards. This means that you get lesser tax liability. Take, for example, a $1000 deduction claim in the 24% tax bracket. You will have about $240 less in tax liabilities. Deductions reduce on the taxable income, reducing the inherent burden.
When buying a house, some possible deduction claims are mortgage taxes among others. Read on for a comprehensive analysis of how you can use these to your advantage.
1. Mortgage Interest
This provision allows you to deduct all of your mortgage interests. A yearly cap of around $750000 applies as per the Tax Cuts and Jobs Act of 2017. Thus, with a home worth less than that in interest you get to save a lot.
If you took a mortgage loan before effecting this Tax Act you can claim deductions of up to $1 million. The previous provisions also allowed for an additional HELOC deduction of $100000. However, after December 16, 2017 to the year 2026, the TCJA applies.
To find out how much mortgage interest you are paying, look at your IRS form 1098. It is usually sent by the lender after the end of the tax year. So, in January, be on the lookout to determine what you paid in the last year.
Should you have trouble finding this amount, most lenders and brokers will willingly show you. Once you have the exact amount, file for deductions. In some cases, you can file interests paid during home closing as deductions too.
2. Loan Points
Some lenders require one to pay points for refinancing or new loans. The points come as a percentage of the total loan amount. The amount arising from these points paid out to the lender is eligible for deductions.
The deductions are distributed over the life of the loan repayment period. If for every month $10 of the amount goes to points, that’s what you will deduct. For a year, this amounts to $120.
It is important to note that point deduction only happens if you paid the equivalent in cash to your lender.
3. Home Sale
Some proceeds from a home sale are not taxed, as long as you meet the residency requirement. Residency requirement dictates a minimum of two years living in the house for the five-year period ownership minimum.
If you meet the above requirement, $250,000 of your profits will go untaxed. If married, and both of you meet the residency requirement, $500,000 of the profits goes untaxed.
In some special cases, the residency requirement minimum is adjustable downwards. Such cases include a home sale due to a divorce, or change of work place.
4. Property Tax Payments
The TCJA Act reduced the flexibilities around property tax payment deductions. Still, you can deduct a maximum of $10,000 for combined state and local property taxes. This considerably helps reduce your tax debt
To find the deductible amount, look at your IRS Form 1098 if your lender allows adding property tax to mortgage payments. If you pay the taxes directly to your local authorities, look at your payment records.
In case whoever sold you the property prepaid property taxes, those too are deductible. Proof of such amounts is available in the settlement sheet.
5. Private Mortgage Insurance (PMI)
Private Mortgage Insurance protects buyers should they default on loans. It applies in cases where the buyer makes a deposit less than 20% of the amount.
Deductions on PMI only apply to mortgages taken after 2007. Couples can claim deductions if their adjusted gross income is $100000 or less. Singles get to make claims only if they earn $50000 or less.
Beware – this provision gets reviewed annually. Make the full 20% deposit to avoid uncertainties. However, since this is not always possible, the deduction justifies a PMI if you have to go that route.
6. Energy-Efficient Upgrades
Energy-efficient upgrade deductions are facing a gradual phase-out. You might want to claim those real soon. There is still quite some considerable amount you can get depending on when you partook the costs.
Upgrades done between January 1, 2017-December 31, 2019 are eligible for a 30% deduction. Those undertaken between January 1, 2020 to December 31, 2020 are capped at 26%. If you intend to undertake such upgrades between January 1, 2021 to December 31, 2021, you will get 22% worth of deductions on amounts spent.
7. Aging In Place
As one ages, they have an option to make a conscious decision to stay put in their residence. Should that be the case, deductions apply on anything spent in ensuring quality living.
For instance, costs spent in building a wheelchair ramp could count as a deductible. Other costs such as those on adjusting fixtures for easy access are deductible too. Anything that counts as necessary in helping you live comfortably as you age, counts as a deductible.
If you are not sure on what counts as deductible, you can always speak to a tax expert.
8. Working from Home
For those whose homes double up as offices, they can also benefit from tax deductions. Any expenses spent on your home office are eligible. This is regardless of whether the work done at home is full time or a side-hustle.
The law allows for a $5 deduction for every square foot of office space. Since the total space deductible is capped at 300 square feet, you can get a maximum deduction of $1,500.
By assessing what you can gain in terms of taxes from home purchases, you can make better decisions for the future. If you have been wondering whether to rent or buy this article could serve as an eye opener.
Nevertheless, many variables are involved in making such serious decisions. Talk to your tax expert to get a broad understanding on the matter. The benefits above scratch the surface and there is still more that you need to consider.