Investing in the purchase of a home could potentially increase a homeowners’ tax refund. However, it is important to understand how to receive these tax benefits if you want to start saving on your income taxes.
Tip #1: You Must Itemize Your Deductions
When you file your taxes, you have to itemize your deductions in order to reduce your tax liability. This will vary based on whether you are single, married filed jointly, married filed separately, and so on.
In regards to homeownership, you can deduct the interest you paid on your mortgage for the previous year, as well as property taxes. You may also be able to deduct other costs related to the purchase of the home, like any points you paid.
Regarding private mortgage insurance (PMI), previously you could deduct your premiums, but this IRS deduction has expired. There is a bill that was introduced into the House to make this a permanent deduction, but that is still pending. Unless the bill is passed before the end of the year, then, right now, you will not be able to deduct PMI from your tax returns.
Tip #2: Include Other Deductible Expenses
Aside from deducting your property taxes and the interest paid on your mortgage, you will want to look for other deductible expenses. Some examples include:
- Home office deductions if you work out of a dedicated room in the home.
- Medical expenses not covered by your insurance.
- Vehicle depreciation if you own your own business and use your personal vehicles.
- Business travel expenses not reimbursed by your employer.
- Charitable contributions of cash and goods.
- State and local incomes taxes.
- State and local sales taxes (for states that do not have state and local income taxes).
- Sales taxes on major purchases like automobiles and boats.
- Vehicle registration taxes.
- Student loan interest.
- College tuition and supplies expenses.
- Childcare and daycare
The reason you want to look for other deductible expenses is that your total deductions, including those related to your home, must exceed your standard tax exemption. If you do not exceed the personal exemption amount, then you will not be able to deduct your mortgage interest and property taxes.
Tip #3: Compare Your Standard Deduction to Itemized Deductions
You should take the time to determine whether you will be able to use itemized deductions to reduce your tax liability. For the 2017 tax year, the standard deductions allowed by the IRS were:
- $12,700 Married Filing Jointly
- $6,350 Single or Married Filing Separately
- $9,350 Head of Household
You need to look at what deductions you have, add those up, and then see if it is more than your standard deduction. If it is, then you can deduct your mortgage interest and property taxes along with your other deductions.
Tip #4: Deductions Are Not Dollar for Dollar
Some people have the misconception that they get a $1 reduction in tax liability for every $1 they deduct. This simply is not the case. Instead, there are different formulas the IRS uses to determine the exact amount by which you can reduce your taxes, based on the type of deduction.
Rather, the amount of you receive is based upon your current tax bracket. For instance, if you are in the 15% tax bracket, the amount you receive for your mortgage interest deduction will be less, compared to if you were in the 25% tax bracket.
To determine the dollar amount of your deductions, there are various calculators you can find online, or you can consult with a tax refund accountant.
Tip #5: Mortgage Interest Will Decrease Over Time
As you pay on your home loan, the amount of your deductible mortgage interest will start to decrease. This is because, as the loan ages, a greater amount of your monthly payment is applied toward the principle.
As you can see, buying a home could provide potential tax savings and help increase the amount of your tax refund. The key thing to remember is you do have to itemize your deductions to enjoy a tax advantage.
For more information on how buying a home or refinancing your existing mortgage could increase how much you get back in taxes for owning a home, please feel free to contact A and N Mortgage by calling (773) 305-LOAN (773-305-5626) today!