Buying a home is already stressful enough. But mention taxes, and homeowners are running in the opposite direction. Here are some tax tips to help make the process a little easier:
- The Biggest Tax Break: Mortgage Interest
Your lender will send you a Form 1098 at the beginning of the tax season, usually January, listing the mortgage interest you paid during the previous year. That total is the amount that you deduct. The 1098 should include any interest you paid from the date you closed on the home to the end of the month. If that amount is not listed on the 1098, you can still deduct it if it is on the settlement sheet, but make sure you save that document in case the IRS pursues an audit.
The amount of points (the percentage of the loan amount) you paid to your lender out of pocket to secure your mortgage can be claimed as a deductible. The deductible amount of points can also be found on the 1098 form.
- For First-Time Buyers: Penalty-Free IRA Payouts
You are allotted a $10,000 withdrawal lifetime cap from your traditional Individual Retirement Arrangement (IRA) account for buying or building a home within 120 days of the time it is withdrawn. If you are married, you and your spouse can each withdraw $10,000 – penalty-free. To qualify as a “first-time buyer”, you simply cannot have owned another home for more than two years. Typically, the IRA penalizes you 10 percent of the withdrawal, but this penalty is waived in this instance. However, that money would still be taxed in your top bracket meaning 40 percent or more could go to federal and state tax collectors rather than towards the intended down payment. This withdrawal should only be accessed as a last resort, but it’s good to know it’s an option.
- Save Receipts
You should track all home-related expenses such as home improvement expense receipts. There is no deduction for renovations that are not energy efficient, but when the added value of landscaping and fences is added into the re-sale price, the IRS is going to want documentation to limit the tax bill on your profit.
- Energy Credits
By making any eligible home improvements, such as energy-efficient windows or a heating and cooling system, you may be able to take a 10 percent tax credit, possibly up to $500! This is a lifetime credit, though. Once you have claimed it one year, you do not claim it in the following years unless additional improvements are made.
Tax season can be daunting, and the task can be put-on-the-back-burner until the last minute because we simply don’t want to do it. With these tips and tricks, you’ll already be ahead of the curve and ready to handle getting it done. Good luck!