Buying a home is a big undertaking, but your new home purchase might help you enjoy a world of tax breaks. If you're a new homeowner, you should know that there are several tax deductions available, some of which can put a fair amount of money back in your pocket. Here are a few tax benefits of homeownership that can really add up.
1. The mortgage interest deduction
The mortgage interest deduction is typically one of the largest tax breaks available to homeowners, as it allows you to write off interest on up to a $500,000 loan if you're a single tax filer, or a $1 million loan if you're a joint filer. This deduction can be especially lucrative during the early years of your mortgage, when the majority of what you pay each month is applied to interest as opposed to your loan's principal. Along these lines, if you're a couple filing jointly, you can also deduct the interest you pay on up to $100,000 in home equity debt.
2. The property tax deduction
The average American household pays a little more than $2,000 a year in property taxes. But in some states -- namely, New Jersey, New Hampshire, and Vermont, which currently top the list of states with the highest property taxes -- that figure can be considerably higher. There's an upside to paying high property taxes though, and it's the ability to take a larger deduction on your taxes. One thing you'll need to remember about this deduction is that you must claim it the year you actually make your payments. Since property taxes are typically paid quarterly, you might, for example, pay your first quarter taxes for 2017 in December of 2016. If that's the case, then you'd actually take a deduction for that payment on your 2016 taxes.
3. The points deduction
Some borrowers pay points on their mortgage in exchange for a reduced interest rate. Points are essentially an up-front fee you give your lender when you sign your mortgage. One point on a mortgage is equal to 1% of your loan value, so if you take out a $200,000 mortgage and pay one point, you'll spend an extra $2,000. The good thing about points is that they can work as a tax deduction, if not right away then over time. If the points you pay are in line with the industry standard, and the purpose of your mortgage is to purchase your primary home, then you're allowed to take a full points deduction right away. Otherwise, you can still take the deduction, but you'll need to spread it out over the life of your home loan.
4. The PMI deduction
If you weren't able to come up with a 20% down payment for your home, you probably got hit with PMI, or private mortgage insurance. PMI usually ends up equaling 0.5% to 1% of your home loan's value, so if you take out a $200,000 mortgage, you can expect to pay anywhere from $1,000 to $2,000 in PMI. But while that extra expense is far from ideal, it could serve as a tax deduction if your income is low enough.
Currently, you're allowed to take a PMI deduction if your income is $54,000 or less as a single tax filer and $109,000 or less as a couple filing jointly. The deduction also starts to phase out at even lower income levels -- $50,000 for single filers and $100,000 for couples filing jointly.
5. The home office deduction
If you're freelance or self-employed and work from home, the home office deduction could save you some money on your taxes. The IRS permits you to write off a portion of the expenses (such as electricity, water, and internet service) that enable you to conduct business from home. To calculate the home office deduction, you'll need to figure out how much you spend in total each year and see what percentage of your living space your office takes up. So if you spend $3,000 on eligible expenses and your office takes up 100 square feet in your 2000-square-foot home, you can deduct $150. To qualify for this deduction, your home office needs to be a dedicated space reserved for business use only. Will the IRS come to your home to investigate this? Not necessarily, but you're better off being honest.
One final thing: In order to take advantage of these deductions, you'll need to itemize on your taxes. But if your tax-deductible costs of homeownership are high enough, it pays to forego the standard deduction in favor of itemizing.