Most everyone knows to write off the interest paid on a home mortgage, come tax-time. (You do know to write that off, don’t you?) First-time homebuyers, especially, can see huge tax savings with this write-off, as the early payments are typically mostly only interest.
There’s more good news, though: There are many other ways homeowners can save on taxes. As the year winds down and you file away your annual finance records, it’s a good time to consider some of the ways you can save a little money on your annual income tax return. Here are our top five:
Depending on your credit history, your lender may have required you to pay points on closing, in addition to mortgage interest paid monthly. Essentially points are just prepaid interest, and they’re deductible in the eyes of the IRS. There are some caveats, such as your loan must be a secured one. First-time homebuyers can likely deduct the points all at once, though for refinances or second homes, you might be required to spread the deduction over the life of the loan. The full rules are available from the IRS.
2. Mortgage insurance
This is another hidden gem primarily for first-time buyers — as they can often make a down payment of less than 20 percent of the home’s price, but are required to carry private mortgage insurance, or PMI, to protect the lending bank in the event of a default. You guessed it: You can deduct these premiums from your taxes, provided you meet a set of criteria that includes an income threshold, the house is not a rental unit, and that you itemize deductions.
3. Property tax
If the house is your primary residence, you qualify for a homestead exemption from some of your property taxes in many municipalities. But the property tax that you do pay is deductible every year. If you reimbursed the home seller for a portion of their property taxes for the year, that amount is also deductible. But do your research. “Some things on your settlement document that might look like taxes really aren’t,” warns MarketWatch reporter Daniel Goldstein. “You can’t write off your attorney and appraisal fees, title insurance and credit report costs.”
4. Energy credits
A broad range of home improvements geared to energy efficiency — water heaters, windows, HVAC systems and the like — qualified for federal tax credits through 2016. So if you performed any of those improvements last year, be sure to seek those credits. That program is dead with no immediate plans for reinstatement, but there still are credits available for solar systems through the federal government. So if you’re exploring options for solar panels or solar water heaters, plug into the Energy Star website for details.
5. Tax-free/penalty-free IRA payouts
If you’ve built an IRA nest egg with an eye to retirement, you can withdraw up to $10,000 of that to buy your first home and avoid the 10-percent penalty you’d normally be subject to. Your spouse can do the same, giving you up to a $20,000 war chest. It’s not a tax rebate, per se, but IRAs are most often untaxed on the front-end, so you’d dodge paying taxes on that down payment entirely. Your age doesn’t matter, so long as it’s your first home (or you haven’t owned one in the past 2 years). You’ll need to use the money on the house within 4 months, though, so don’t pull it out of your IRA until you need it.
These five tax tips, plus the ability to write off mortgage interest in the first place, can put the financial picture of buying a new home into a lot more attractive frame, especially for first-time home buyers.
Be sure to let Carter & Associates know if now’s the time you want to start looking for that first home. Call or text me at (404) 944-6577 or drop us a line at email@example.com.