8 Tax Breaks for the First-Time Home Buyer
Things have dramatically improved for Americans and the US economy since the Great Recession which many blame on Barney Frank and Alan Greenspan. And they are only going to get better!
With somewhat improved job security and some better-paying jobs finally being seen on the horizon because of President Trump’s moves and businesses finally having someone who listens to them in the White House, tax breaks for new and existing homeowners can make the prospect of owning and buying a home a lot more attractive.
A house is an asset for new owners that can help bring down their tax liability considerably. However, they need to be aware of the many rules and housing tax deductions that can help them evade thousands of dollars in taxes to help them offset the cost of ownership.
Receiving all the tax breaks for homeowners may entail some amount of paperwork, but the savings are certainly worth the effort. Read on to know more on how you can avail tax deductions and keep more money in your wallet or purse!
Here are eight tips to save your hard earned money:
- Deduction of mortgage payment interest
The deduction of mortgage interest is typically the biggest tax break for a new home buyer. It includes interest on loans of up to one million dollars. This particular tax break is a boon to mortgage borrowers with new mortgages since interest rate charges homeowners are required to pay adds up throughout a year.
A house owner should file a detailed tax return to claim this deduction. The loan provider will send you Form 1040 just after the end of the year, outlining the interest you have paid during the prior year.
- Certification of mortgage credit
The Mortgage Credit Certificate Program is yet another smart way for first-time owners to get tax breaks on the mortgage interest which will be sizable. It is aimed to assist individuals with low income in the pursuit of home ownership. Instead of a deduction that diminishes the taxable income, the credit counts directly against the tax bill, thereby lowering the amount that you owe.
A buyer can get back 20% to 30% of the annual interest he or she pays on a mortgage. Since the state and local government controls it, the interest levied varies from state to state.
A buyer needs to qualify for the benefit. Meanwhile, the state or local government will issue a Mortgage Credit Certificate at the time of commencing the mortgage for purchasing the home. All the mortgage details are to be included here. You can also use the IRS Form 8396 to claim the amount after you qualify for this benefit.
- Deduction of mortgage points
The interest paid for the payments of monthly mortgages is not the only way of making you qualify for tax deduction. The mortgage points, which is nothing but prepaid interest, also allow the borrower to lower the rate of interest. Since this is a payment against interest, it qualifies for deductions. The amount of this deduction can be to the tune of thousands of dollars. That is a lot of movie tickets, another computer and a new set of tires, some new furniture, a paint job for your home or car, and so on!
- IRA withdrawals free from tax
If you have decided to buy a new home, consider pulling out some funds from an IRA. It will help cover the cost of the down-payment. If you are a first-time homeowner who has to dig into your IRA to cough up your down payment, you will not need to pay the penalty of 10% that applies to pre-age withdrawals. Existing homeowners too can benefit from this incentive. If you have not bought a new home in the past two years existing house owners can benefit from the tax break.
- Deduction of real-estate tax
According to a stellar financial planner, Laurie Samay, taxpayers who itemize their deductions on Schedule A can reap real-estate tax deductions on both primary and secondary residences. It is, however, critical that real-estate taxes are paid within the year of filing, to gain this rebate. It goes without saying that this tax must be on a property that you own, and not a home belonging to someone else.
- Home improvements
There are two ways by which home improvements can qualify for deductions. A home equity loan, or any other loan that you secure for undertaking a home improvement project (another room, new carpet, an interior paint job, a kitchen remodel, and so on), will be eligible for the same deductions in mortgage interest as the first mortgage.
Tracking home improvements will help you when you decide to sell your house. All these costs can be added up to the selling price of the building. You can write off the improvement costs to reduce your tax burden. Not a bad deal, now you can perhaps have some more money to visit Las Vegas, buy two more flat screens, or just save that money for your children’s college education, for instance.
- Deduction of home office
In case you are working from home, the room that is the ‘office’ can help you lower the taxes. For example, a garage can serve as a typical space for an office for a TV repair business. It includes all germane expenses like repairs, insurance, utilities, and mortgage interests. The portion of your home that you devote to business activities determines the extent of saving. However, you need to furnish accurate information about the workspace to reap the benefits.
- Credits of energy tax at home
If you plan to make your home a bit greener, the cost of undertaking improvements for energy efficiency may also earn credits by grabbing the benefits of the Residential Energy Efficiency Property Credit. The cost of equipment for making your home for energy efficient can be reduced by a substantial 30%, which is an excellent incentive to improve the efficiency of your home and lower the costs of powering it. Since it is a credit, it will help you reduce your tax bill directly. Even after watching the annoying and ridiculous Star Wars: The Force Awakens movie this news will increase your spirits!
It applies to the technology incorporated into energy harness off-the-grid, solar panels, wind turbines, fuel cells , and geothermal heat pumps. You should use Form 5695 to claim the reduction, provided you have all the receipts and contracts.
Most Americans dream of owning a home despite the fact that it can be a costly proposition and will even get better with the moves the Trump administration is making since it has been hard for Americans to buy a home because of some of the regulations. We certainly do not want to return to the Barney Frank Community Reinvestment Era, though! Trump will find some middle ground here.
The tax code of this amazing country contains some provisions that empower families to afford a home, but since America has become a nation of renters, this will soon change under Trump.