Are you a new homeowner? Buying a house gives you a chance to claim a little corner of the world as your very own. It is also gives you a chance to start claiming some great tax breaks.
The government loves to incentivize homeownership through the tax code, so you'll not only get some new deductions along with your spacious new kitchen and cozy living room, but you might also get some tax credits. Check out these five ways homeowners could lower their tax bill as they settle into their new abode.
1. Mortgage interest deduction
The mortgage interest deduction is such a popular deduction, it's sometimes called the "third rail" of tax reform, because no politician wants to touch it. Homeowners are allowed to deduct mortgage interest on loans of up to $1 million, or up to $500,000 if married filing separately.
You can take a deduction on mortgage interest for both primary homes and for second homes -- and "home" is broadly defined to include "a house, condominium, cooperative, mobile home, house trailer, boat, or similar property that has sleeping, cooking, and toilet facilities."
To be eligible for the mortgage interest deduction, you must be a primary borrower who has a legal obligation to pay the debt, and you must actually make payments. You can take this deduction only if you itemize your deductions. You should ensure that your deductible mortgage interest -- along with any other tax deductions you could claim -- exceed the standard deduction of $6,350 for single taxpayers and $12,700 for married couples filing jointly, as of 2017. If your total deductions are less than your standard deduction, then itemizing isn't worth it.
You will receive Form 1098 from your mortgage loan provider letting you know how much deductible interest you have. You're also allowed to deduct loan interest on up to $100,000 in home equity debt, or $50,000 if you are married filing separately. So don't forget to factor in that deduction if you have a home equity loan or HELOC.
2. Mortgage tax credit
The mortgage tax credit allows certain eligible homeowners to claim a credit for interest paid on their mortgage. The mortgage tax credit is a very valuable perk for those who are eligible. Unlike the mortgage interest deduction, the mortgage tax credit does not just reduce your taxable income; it gives you a dollar-for-dollar reduction on taxes owed. If you owed the IRS $3,000 and claim a $1,000 tax credit for interest paid on your mortgage loan, your tax bill drops to $2,000.
To be eligible to claim the mortgage tax credit, you must have been issued a Mortgage Credit Certificate (MCC) by your state or local government. Different states have their own eligibility requirements for whom these MCCs are issued to, and they have different rules for how much interest can be counted in determining the amount of the credit.
The Florida Housing MCC program allows eligible first-time home buyers to claim up to 50% of paid mortgage interest as a tax credit, up to a maximum of $2,000 annually. There are borrower income limits and home purchase price limits, which vary by location. The Texas MCC program is less generous and allows eligible homebuyers to take a credit equal to only 40% of interest paid on a mortgage loan, up to $2,000.
If you receive an MCC from your state or local government and are eligible to claim this credit, complete IRS Form 8396. This is a non-refundable credit, so you can only reduce federal taxes by the amount owed. If you owe $1,000 in taxes and have a $2,000 mortgage tax credit, you will reduce your taxes to $0 but will not get the extra $1,000.
3. Deduction for mortgage loan points
When you closed on your mortgage loan, you may have paid for discount points. Points are paid to lenders to reduce the interest rate on a mortgage loan. Each point costs 1% of the mortgage amount, so you pay $1,000 for every $100,000 you borrow.
Because points are considered pre-paid interest, you can take a tax deduction for points you buy when you close on your mortgage. The rules for points are the same as rules for mortgage interest deductions. You must itemize to take the deduction and can only deduct on loans up to $1 million. Your mortgage settlement disclosure also must specifically list the fees you pay as "points."
4. Deduction for real estate taxes
Homeowners must pay real estate taxes, or property taxes, every single year. If you buy a home mid-year, you have to pay pro-rated taxes at closing. Once you own your home, taxes can be paid once annually to the taxing authority. You may also pay money toward your taxes as part of your monthly mortgage payment, which your lender puts into an escrow account to pay your annual property tax bill.
However you pay your property taxes, you can deduct the amount that you paid from your federal taxes. As with your mortgage interest deduction, you must itemize to benefit from the real estate tax deduction. You can claim this deduction by listing the amount of real estate tax paid on line 6 of your Schedule A (Form 1040).
5. Deductions for improving your home
Now that you own your home, you may want to make some improvements. The good news is that the IRS will actually give you a tax credit for some of the fixing-up you do. If you install a solar energy system in your home, you can claim a tax credit for up to 30% of the cost of the system, with no upper limits. This is a tax credit, not a deduction, so it will reduce your taxes dollar-for-dollar. This credit is available through December 2019. Installations made during 2020 will be eligible for a 26% rebate, and those made during 2021 will be eligible for a 22% rebate.
If you made other energy-efficiency improvements prior to Dec. 31, 2016, you could also be eligible for 13 additional energy-efficiency credits that expired at the end of last year. These include credits for updating old furnaces and installing energy-efficient windows. Although homeowners who make improvements in 2017 won't be able to claim these credits, the credits could be reinstated in the future.
And don't forget that if you take a home equity loan or line of credit to pay for home improvements, you can also deduct interest on that loan.
With all of these tax credits, you might get back a nice chunk of change from Uncle Sam to cover many costs you pay as a new homeowner. It's up to you whether you want to save that refund for a rainy day or buy that new dining room furniture you've been eyeing.