Buying a new home can be an exciting and rewarding experience. While first-time homeownership can come with a lot of initial expenses, it also can come with some money-saving tax breaks as well. With tax season in session, now is the time for homeowners to take advantage of some tax breaks on their recent purchase. If you are a first-time homeowner, be sure to check out the five tax tips listed below.
1. Make Sure to Itemize Your Home Mortgage Interest
In many cases, homeowners will want to itemize their tax deductions. One of the itemizations on a 1040 tax return is the interest paid on your home mortgage1. Even those who get a great rate on their home purchase may exceed the standard deduction between their interest and other itemized deductions. Each year your mortgage lender is required to provide you with a form that lets you know exactly how much interest you have paid for the tax year. This is called Form 1098 and it will help you fill out your itemization (the amount shown as interest paid on Form 1098 is the amount you deduct on your tax return).
2. Look Into Possible Energy Tax Credits
When you purchase a new home, you will often buy items to improve your home either shortly after your initial purchase or over the span of your home ownership. While many improvements can work toward increasing your home's value and your equity in the home (think kitchen remodels and finishing a basement), home improvements can also help you save on things such as energy costs.
Due to concerns about the environment and energy use, the government will reward homeowners with tax credits when they make certain improvements that reduce the energy use in the home. These are referred to as energy tax credits and can cover such qualifying improvements as energy-efficient skylights, doors, and windows, new roof and insulation systems, heat pumps, furnaces, water heaters, and even some qualifying air conditioning systems. Energystar.gov is a great resource to explore what improvements qualify and learn more about the program.
3. Your Property or Real Estate Taxes Are Deductible
If you have a mortgage, your lender will usually set things up so that part of your monthly payments will go into an escrow account that will pay your homeowner's insurance and twice a year will be used to pay your property taxes that are paid to the city that you live in. All property taxes or real estate taxes that are paid during the tax year will be able to be added as a deduction on your tax return. The amount you paid from your escrow account for your property taxes will be listed on the Form 1098 you will receive from your mortgage company at the end of the year. Your lender is required to send this information to you by the end of January, so be sure to study your January statement from your mortgage lender carefully, as Form 1098 may be part of, or attached to, your regular monthly mortgage statement.
4. Any Mortgage Points You Paid Might Be Deductible
Some mortgage companies may require points to be paid during the loan process. These points are a percentage of the loan amount that is prepaid interest required to secure your loan. If the collateral that is put up against the loan is your home (which is most often the case), the points are deductible on your return. The amount that you will be allowed to deduct for the year will most likely be listed on your 1098. If not, it will be a line item on your settlement statement as origination fees or points.
5. See if Your Home Office Qualifies You for Deductions
If your new home serves as a base for your business or has a space that qualifies as a home office, you may be able to write off some of your home expenses such as some of the utility costs, repairs, insurance, and even the space you use to operate your business. To make sure that you are making appropriate deductions under a home business it may be best to consult with a tax professional to see what qualifies.
Take advantage of all the perks homeownership has to offer by following the five tax tips for new owners listed above to maximize your deductions and get the most out of your return.
Storybook Financial is a financial planning firm determined to help those that believe in the betterment of the world around them. As a fiduciary, our service promotes unbiased financial planning with an emphasis on young medical professionals and their families. We are constantly pushing for new ways to give back to the Cystic Fibrosis community. We are based out of Iowa City | Coralville Iowa, but we serve clients nationwide with our robust virtual presence. This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.