From building equity to giving you a chance to settle down and plant roots, homeownership comes with potential benefits that renting simply doesn’t offer. Among them are several tax advantages worth knowing about.Here’s a quick look at how to make the most of those tax deductions.
Deducting mortgage interest
Unless you recently won the lottery, chances are good that you took out a mortgage to pay for your home. If that’s the case, then you already know that this type of loan is a big commitment that often spans up to 30 years. But you may be able to deduct the interest you pay on a mortgage that doesn’t exceed $1 million. That limit shrinks to $500,000 if you’re married but filing taxes separately from your spouse.
As tax season approaches, your lender will send you a Form 1098, which states how much mortgage interest you’ve paid in the past year. Once you know that amount, you’ll have to itemize your deduction using Form 1040’s Schedule A. The amount of money you’ll save depends on your taxable income. Generally speaking, the higher your earnings, the more money you can save.
Property taxes also qualify for deductions
Homeowners can also reduce their taxable income by deducting their property taxes. Your lender has probably set you up with an escrow account, which is used to pay for things such as homeowners insurance and property taxes. To figure out how much money to deduct, take a look at the escrow statement to see how much you paid in taxes. You’ll generally be able to cut your taxable income by that amount.
Other deductions worth noting
Deducting mortgage interest and property taxes are the two biggest benefits when it comes to taxes. However, if you’ve taken out a home equity loan or line of credit, you may be able to deduct the interest up to $100,000, or $50,000 if you’re married but filing separately. If you made upgrades to your home to curb energy use or related to medical care, those costs can also be deducted. That includes additions such as ramps, handrails and widened hallways.
Because financing and maintaining a house or apartment can put a real dent in your wallet, it’s a good idea to take advantage of all the help you can get. “Making sure you get every tax advantage of home ownership can be confusing,” says Jean Field, EA Liberty Tax Service- Rock Hill. “Not only are there direct tax benefits like the tax deduction for mortgage interest and real estate taxes, there is the potential added benefit of itemizing other deductions such as charitable giving and job related expenses.” To maximize the tax breaks that homeowners qualify for, be sure to keep an eye out for Form 1098, as well as the escrow statement.
“To ensure that you are getting every tax benefit possible it is best to work with a professional that can discuss your personal situation. It’s possible that by taking advantage of every tax deduction for which you are eligible it may pay for those home improvements!” Although filling out and filing these documents may take some getting used to, it may be well worth the effort. Talk to your tax advisor to find out what deductions you qualify for.
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