How Homeowners Can Get The Maximum Tax Refund.
Owning a home. Ask any homeowner what’s so great about owning versus renting, and most will say “the tax deductions!” That’s right because all homeowners who itemize their taxes are able to deduct 100% of their mortgage interest and property taxes from their income tax returns. But how do you get the maximum tax refund for homeowners? If you don’t own a home yet, there may be good reasons, but the advantages of owning a home far outweigh renting. There are really only two reasons not to own a home-you may live rent free with your parents or friends or perhaps you are planning on moving in 3 years or less. Even if you are single, but plan on staying in the area for more than 3 years, consider buying a home.
The major tax incentive to owning a home is that it allows you to deduct the interest you pay for your mortgage. This is usually the biggest tax break for most people, because a significant amount of your house payment goes toward interest during the early years of a mortgage. The major advantages of being a homeowner when tax season comes around?
Deductible mortgage interest including “points” when you buy your home.
Deductible property taxes on your return.
Deductions for improvements made to your home when you sell.
Up to $500,000 in tax free capital gains profit when you sell your home.
To get the maximum tax refund for homeowners you will have to use Form 1040 and itemize your deductions. If you’re in a 28% tax bracket, the government effectively subsidizes about a third of your borrowing costs, making your home more affordable. Also, your closing costs and points are tax deductible, and hundreds of thousands of dollars of any capital gains profit that you realize when you sell your home are exempt from income taxes.
At tax time, it’s critical to know what you’re entitled to, so you can claim it. So, here are five essential tax tips to get the maximum tax refund for homeowners.
1. Fill out the long form at least once and learn to itemize your deductions.
Nearly 40% of homeowners lose out on the number one tax advantages every year when they fail to itemize their income taxes. If you own a home and otherwise have a fairly simple return, it might be tempting just to take the standard deduction or file Form 1040A. In some cases where your mortgage, property taxes and income are low enough, the standard deduction may be a larger deduction than your itemized deductions. But you’ll never know unless you fill out both forms at least once.
So before you start filling in Form 1040A or 1040EZ, get your paperwork together and answer the questions on tax software like TurboTax, which will automatically do the math on whether itemizing or taking the standard deduction will result in the lowest tax bill.
Why do the extra work? You can only pay less tax, never more by filling out the longer Form 1040.
2. Home office deduction.
The average home office deduction is over $3,000. Of course there are special IRS rules on what you can claim as a home office. The space you claim as your home office cannot be exempted from capital gains tax when you sell your home. Visit the IRS.gov website for complete details.
3. Tax relief for loan modifications, foreclosures and short sales.
The Making Home Affordable ® Program (MHA) ® is an important part of the Obama Administration’s comprehensive plan to stabilize the U.S. housing market by helping homeowners get mortgage relief and avoid foreclosure. To meet the various needs of homeowners across the country, Making Home Affordable ® programs offer a range of solutions that may be able to help you take action before it’s too late. You may be able to refinance and take advantage of today’s low mortgage interest rates and reduce your monthly mortgage payments.
While the long-term housing outlook began improving in 2011, loan modifications are projected to be the peaking this year. Distressed homeowners who are on the brink of a short sale, loan modification or foreclosure should be aware that normally, any mortgage balance that is wiped out by one of these outcomes is taxed as what the IRS calls Cancellation of Debt Income, or CODI.
Under the Mortgage Debt Forgiveness Relief Act of 2007, the IRS is currently not charging income taxes on CODI incurred through a loan modification, short sale or foreclosure on most residences through 2012. But banks are taking many months, or even years, to work out new mortgages. If you see any of this happening in your future, don’t put things off. Get free advice from a housing expert at MakingHomeAffordable.Gov. or call 888-995-HOPE (4673) to speak with an expert.
4. The tax consequences of a refinance or property tax appeal.
Homeowners everywhere are working on applying for a lower property tax bill on the basis of the last few years’ decline in their home’s value. Those who have equity have tried to refinance their existing home loans into the 4% to 5% rates of the last few years. These strategies offer some of the biggest savings today. But here’s a small warning for homeowners who are able to cut these costs. Property taxes and mortgage interest, the very costs you’re minimizing, are also the basis for the major tax benefits of being a homeowner. So plan ahead for your tax deductions to go down along with your taxes and interest.
5. Don’t forget the closing costs.
If you bought or refinanced your home, you may be focused on your mortgage interest and property tax deductions that you forget all about your closing costs. Remember that any origination fees or discount points that were paid to your mortgage lender at closing are tax deductible on your return. When you finance a home, you may pay what are called “points.” Points lower the interest rate on your mortgage by effectively prepaying a portion of the interest at closing. Points are paid by the borrower to the lender as part of the loan deal, and they are a percentage of the loan. Points may also be called loan origination fees, maximum loan charges, loan discount or discount points. If you can’t figure out exactly what you paid, look for your HUD-1 settlement statement. It is full of line item credits and debits that you should have received from your escrow provider or title attorney at closing.
Helpful Hint:There are two things you can count on when you become a homeowner: You get more tax breaks, and your taxes get more complicated. Whether you’ve purchased a single-family home, townhouse or condominium, tax breaks are available to you. It’s time to get familiar with tax forms because that’s where you will have to provide all the details about your new tax-deductible expenses.
Don’t forget PMI premiums on your tax return. PMI is private mortgage insurance premiums on certain mortgages. If you make a down payment of less than 20%, you are generally required to carry private mortgage insurance. This type of insurance is paid for by the buyer but protects the lender in case the borrower stops paying on the loan. PMI premiums can be deducted if the mortgage was issued after 2006. This deduction may be changed in 2012 so check the IRS website for current information.
Final Thought: There are also huge tax savings on the gain when you sell. If you are going to live in your home for at least 5 years considering buying a home just for this reason. When you sell your home, the amount of your gain from the sale is tax-free if you meet the criteria. If you are married, you can have up to $500,000 profit on the sale, and you won’t have to pay tax on the earnings. If you are single, you can earn up to $250,000 profit without paying any federal tax. There’s only one catch: You have to own and occupy your home for at least two of the past five years. Visit IRS.gov for more information.
10 Sure-Fire Ways An Independent Contractor Can Save Money On Taxes
File Your Taxes With Online Income Tax Return Services
Student Loans – How to Choose a Lender