Tax benefits still beckon for home ownership. If you’ve been on the fence about taking the plunge into buying a new home or upgrading, there’s no better time than now to jump in.
Make 2020 your year for home ownership and enjoy the same benefits as millions of other homeowners!
When you buy a home, the first few years of mortgage payments are heavy with interest. Because of the way amortization works when payments are spread out over many years, you’ll pay much more interest when your loan begins. That means you’re eligible to deduct those interest payments from your annual taxes. Married couples can deduct the interest for up to one million dollars in mortgage debt for years prior to 2018. For 2018, the maximum is $750,000.
In late 2019, Congress extended an expired tax provision that allowed homeowners to deduct private mortgage insurance. The extension allows eligible homeowners to claim the deduction for 2018, 2019, and 2020.
Points are fees that you pay to the lender at closing in exchange for a lower interest rate. One point is equal to one percent of the loan amount. Borrowers can pay zero to four points, depending on how much they want to reduce their interest rate. You can deduct these from your taxes. In fact, if you’re an ace negotiator and convince the seller to pay the points at closing, you can still deduct those points from your taxes. The IRS has ruled that even if the points were paid by the seller, the borrower can still use this tax benefit for a deduction.
You can deduct points paid when you refinance, too, but you can’t deduct the full amount in the year that you pay them. You will need to allocate them over the life of the loan, so if you obtained a 15-year loan, you’d have to divide the total points paid by 15 and then deduct that amount annually. If you pay off the refinance, you can deduct any remaining points from that year’s taxes.
Real estate taxes are only deductible in the year they were actually paid, but the IRS allows you to deduct both state and local property taxes. Most lenders collect property taxes along with your monthly mortgage payment and set the taxes aside in an escrow account. When the local taxes are due, the lender pays from this account. If you would like to include this deduction, ask your mortgage company for an escrow statement that shows what you paid in the year for which you’re filing taxes.
Additional tax benefits for homeowners include improvements you’ve made to increase energy efficiency. If you installed solar panels, fuel cells, or wind cells and other equipment that uses renewable energy to supply power to your home, you may qualify for a Residential Energy Efficient Property Credit. Ask your tax preparer for more information on this tax benefit.
Additional Tax Benefits for Homeowners
- Many states allow tax credits for the installation of energy-efficient windows and doors and added insulation.
- If you’ve remodeled your home to make it handicap-accessible, you may qualify for tax credits.
- The IRS understands that saving for a down payment on a home and paying for closing costs can cause a financial burden. For this reason, you’re allowed to make an early withdrawal from your IRA. The limit is $10,000, but you won’t be penalized for an early withdrawal. This benefit does not apply to 401K account holders.
The Bottom Line
With all theses tax benefits for homeowners, what’s stopping you? Contact your favorite realtor today to find your perfect home. And then contact your accountant to research all these fabulous benefits!