The Tax Benefits of Home Ownership
Every year, American taxpayers are faced with an IRS invoked deadline to file their tax returns by no later than April15th. The purpose of this filing is to settle your annual tax score with the government. If you purchased a new home in 2015, you may not be aware that there are certain tax benefits to home ownership. In an effort to educate you about some of the deductions you may be eligible to take, this article has been designed as a guide to help you determine ways in which you can lower your tax liability.
Why the IRS Offers Tax Incentives
It should come as no surprise that the real estate industry plays a significant role in the overall health of the American economy. In order to get citizens to participate in helping the economy grow, lawmakers have passed several laws over the years that offer home owners certain tax benefits for buying a home. It began decades ago when Congress passed a law allowing home owners to deduct any interest amounts they paid to mortgage lenders during the tax year. Whenever the real estate market would grow stale, other incentives were added in subsequent years. Today, there are as many as five primary deductions available to home owners. Here is a description of those deductions.
1. Mortgage Interest – Every month you make a payment to your mortgage company, of which a big portion is applicable to interest. The interest amount is fully deductible on your form 1040. At the end of each year, you lender(s) should send you a statement of account that breaks down your total payments into principle, interested and property taxes when applicable. The interest number is the one you use on your tax return. If your home closed escrow on any day other than the first of the month, you were most likely charged prorated interest through your escrow statement for the first month. That amount should be also be included as part of you deduction.
2. Escrow Fees – When you closed escrow on your new home, you or the seller were charged certain escrow fees, including document fees, appraisal fees, loan fees and in some cases interest buy down fees. All of those fees are deductible on your form 1040. For further information about these deductions and the extent to which they may be applicable, you should refer to IRS guidelines.
3. Property Taxes – Every year, you are required to cut a check to your local tax collector for county property taxes. The amount of these taxes is deductible on your form 1040. As was the case with mortgage interest, you were most likely required to pay prorated property taxes through escrow, particularly if you purchased your home during the second half of the year. Any property taxes charged through escrow should be included in your tax deduction. In some cases, lenders will require borrowers to pay monthly impounds for property taxes. The lender then makes the property tax payment on their behalf. If you are having taxes impounded, you can pick up the amount of your deduction off of your annual statement of account from your lender.
4. Homeowners’ Dues and Miscellaneous – In some, but not all cases, the homeowners’ dues you pay on a monthly basis may be deductible. For further information, you should refer to current IRS guidelines. From time to time, Congress may pass temporary laws that offer temporary tax benefits related to home ownership. A good example of this would be energy efficiency deductions. You should consult with IRS guidelines for any new available deductions.
5. Capital Gains Deduction – If you sell your home and lived in that home for any two of the past five years, you are most likely eligible for a capital gains exclusion. The exclusion amount is $250,000 for single taxpayers and double that amount for married couples. After the exclusion, you will still be responsible to pay taxes on any profits above that amount.
Tips on Filing Your Tax Returns With Mortgage Deductions
The Internal Revenue Service is very big on documentation. For any mortgage deductions you actually take on your tax return, you want to mask sure you keep all the supporting documentation in a secure location. Based on new procedures just handed down from the IRS, they have up to six years from the date you filed your tax return to request an audit. All of your tax information should be kept at least that long. Under no circumstance should you ever take a deduction without the proper support. If you have any questions about mortgage related deductions, you are encouraged to contact the IRS through its help hot line.