It's been said that nothing in this world is certain except death and taxes. Well, if you're a homeowner, provisions from Uncle Sam
add annual tax deductions and credits to that short list of sure things. The April 15 filing deadline is fast approaching, so dig up your documentation to itemize the expenditures we've outlined from the US tax code and start claiming your due incentives.
This is the big one. Every year, Americans recover $100 million
from the IRS in the mortgage interest deductions filed on their tax returns. Property owners who took the plunge within the last few years are the biggest beneficiaries. It's specifically the interest on the mortgage loan that's deductible, and, in the early years of a typical amortization loan (one with scheduled interest and principal payments), the heft of the monthly mortgage payment is dedicated to paying off interest. Unless the size of your home loan exceeds $1 million, all of that interest is deductible.
Private Mortgage Insurance
Homeowners who have less than 20% equity in their mortgage loan or refinance loan must typically pay for a private mortgage insurance (PMI) policy that protects lenders in the event of a default. Bundled into monthly payments, PMI premiums became tax deductible as part of the Tax Relief and Health Care Act of 2006 and applied to policies issued beginning in 2007. The deduction remains in effect for any PMI premiums on new mortgages taken out through 2013 and is slated to expire thereafter unless an extension is granted by Congress.
Lenders may charge borrowers "points," or percentage-based fees, when originating home loans in exchange for lower interest rates. Each point equals 1% of the entire amount of the loan, so a 1% fee on a $100,000 loan would collect $1,000 from the buyer. Fortunately, come filing time, taxpayers can deduct the entirety of the points they paid that year. Homeowners who paid points to refinance their mortgages or take out a home equity loan or line of credit are also eligible for the deduction; it would be expressed as an amortization over the life of the loan.
Real Estate Taxes
As long as that deed is yours, a guaranteed exemption is granted for the tax you paid by nature of owning it. At first blush, a tax deduction on a tax may seem a bit oxymoronic, but it's designed to keep income tax from being spent on property tax.
Most homeowners don't write a separate check to a tax authority. Instead, they have real estate taxes packaged in escrow as part of the monthly mortgage payment to their lender. The only property tax that is deductible is the amount the lender actually paid to municipalities over the year from escrow and doesn't include government fees already included in the property tax bill. New homeowners can deduct the full share of property taxes paid upfront at closing. That figure is listed on the settlement statement.
Another get-it-while-it's-hot exemption comes to homeowners in the form of energy-efficient property improvements. A full 10%
of the cost of qualified windows, doors, roofing, and insulation can be claimed, up to a lifetime limit of $500. Originally set to expire at the end of 2011, a recent law kept this credit active through 2013.
Homeowners still have two more years (through 2016) to take advantage of a 30% credit for installing alternative-energy equipment such as solar hot-water heaters, solar electric equipment, and wind turbines, and the deductions on these improvements don't max out. The IRS guidelines further explain that if your credit is more than the tax you owe, you can carry forward the unused portion of this credit to next year's tax return.
Profit on Sale
Easily one of the most lucrative deductions for Americans selling their homes -- to the tune of $45.8 billion in 2014 alone
-- is the growing exemption from homeowners paying capital gains tax on the sale. Turning a profit of $250,000 as an individual or $500,000 as a couple falls within the tax-free limit as long as the property has been the owner's primary residence for at least two years before the sale. And that profit can be used any way a homeowner pleases; it needn't be reinvested in another mortgage.
If surplus on a home sale exceeds the $250,000/$500,000 deduction restriction, sellers can still chip away at the profit by itemizing the costs incurred in selling the home. Marketing and realtor fees, closing fees, repairs, and capital improvements can all be deducted to raise the cost basis and thus lower the taxable profit.
Canceled Debt Forgiveness
Homeowners thrust into foreclosure or a short sale before the end of 2013 are the last to take advantage of a bittersweet tax break that offers relief from counting the canceled debt on a principal residence as taxable income. Begat by the housing crisis, the Mortgage Forgiveness Debt Relief Act of 2007
allowed taxpayers to exclude up to $2 million ($1 million if married but filing separately) of forgiven debt and was originally set to expire in 2009. The obvious need for this tax break well past the deadline convinced Congress to stretch the act through last year, though some argue
it should be renewed indefinitely until the housing market has made a full recovery.
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