Purchasing a home is an important time in any taxpayer’s life. It is the moment when you begin to build equity in an investment. While the investment is large, the United States Government provides tax relief for high mortgage payments.
What Are The Biggest Tax Breaks Available For Homeowners?
If you know where to look, there are several tax breaks that are available for United States homeowners. From mortgage deductions to energy credits, the following areas can help you to greatly reduce your 2015 and 2016 taxes.
Mortgage Deductions: For the majority of homeowners, the largest tax break will come from deducting mortgage interest. It is important to note that deducting the mortgage interest must occur during the tax year. In order to receive a tax break on your 2015 taxes, you must have completed the following tip by December 31, 2015. However, if you didn’t implement this tip in 2015, then you can still use it for your future 2016 taxes. The IRS allows you to deduct interest on up to $1 Million of debt that was used to either improve or purchase your home. In January your lender will send out a Form 1098, which will list the mortgage interest that you paid during the previous year. In the 2016 tax year, homeowners can boost their mortgage interest tax deduction by making their January 2017 mortgage payment in December 2016. In this way, the payment and interest is listed in your 2016 Form 1098, which will help to reduce the amount of taxes owed.
Real Estate Taxes: Many homeowners will be able to deduct the local property taxes that they pay each year. During the year that you purchased your home, you might have reimbursed the seller for Real Estate taxes that he or she had already prepaid. If this is the case, then the amount that you paid will be shown on your settlement sheet. It is important to note that this amount of money should be included in your Real Estate taxes. Since the money was paid during the tax year, you are able to deduct it. A word of caution: be careful to only deduct the Real Estate tax amounts that were paid during the tax year. In other words, if you forgot to deduct monies paid in 2014 Real Estate taxes, then you can’t “make up for it” on your 2015 taxes.
Mortgage Insurance Premiums: While the laws around mortgage insurance deductions are a bit in flux, there is still an opportunity for buyers to receive tax breaks. Did you buy a home this year or in the last nine years? Did you make a down payment of less than 20 percent of the home’s sale price? If so, then you have probably found yourself paying premiums on your mortgage insurance. The good news is that buyers with mortgages that were issued in 2007 or after are allowed to deduct premiums.
Home Improvements: Save your receipts on all home improvements. From landscaping to fencing, storm windows to a new kitchen, home improvements can eventually be used as a tax deduction. In fact, when you sell your home, the cost of the improvements will be added to the purchase price of the home. In this way, the IRS is able to more accurately determine the cost basis and potential taxes owed on the sale of your home. While the majority of a home-sale profit is currently tax-free, there are instances when the IRS will demand payment. Keeping your home improvement receipts can help you to reduce any potential tax bill.
Energy Credits: It is no secret that the United States is becoming a more environmentally-friendly country. With this in mind, there are several energy-saving home improvements that can be set-up to earn homeowners an energy tax credit of up to $500. It is important to note that unlike a tax deduction, a tax credit will reduce your tax bill in a dollar-for-dollar process. Energy credits for up to 10 percent of the cost can be applied to energy-efficient appliances, as well as energy-enhancing skylights, doors, and windows. Energy credits up to 30 percent of the cost can typically be applied to qualifying solar-powered water heaters and generators. In the latter instances, there typically isn’t a dollar cap on the tax credit.
How Can Homeowners Plan Ahead For Taxes In The Future?
Homeowners can plan ahead for future tax seasons by staying up-to-date on changes to tax laws, tax breaks and deductions. Working with a trusted accountant and a team of real estate professionals can further help homeowners to plan ahead for the current and future tax season.
Kelly McDonald is the vice president of sales at Movoto. With a love of coaching and 20 years of history in sales, Kelly is the ideal person to lead the operation of Movoto’s sales organization. She ensures that the sales teams have all the tools they need to help connect people with amazing agents. Kelly is also a council member of the Gerson Lehrman Group and a member of the National Association of Professional Women.
