The Top 4 Tax Perks to Owning a Home - Tax season is upon us, and depending on the circumstances, you may be either excited or stressed about this time of year. Some Americans receive big refunds from the government and look forward to the additional cash, while others end up paying Uncle Sam even more money – so, clearly, they don't enjoy tax time very much! But regardless which scenario describes you, if you own a home, you can look forward to some tax breaks. If you've been a homeowner for some time, you probably already know all of this information, but first time buyers sometimes don't realize the additional tax benefits of owning a home. That's why we've compiled this list of the top 4 tax perks of home ownership:
1. The Mortgage Interest Deduction
This one is the biggie! Nobody likes paying interest on a loan, but it becomes more bearable when you realize that on a home loan, that money is tax deductible. The federal government allows you to claim the interest paid on your home loan during each calendar year as a write-off on your taxes. In layman’s terms, every dollar you spend on interest for your mortgage is one dollar you can deduct from your taxable income. So, if you paid $5,000 in interest in 2012, that's $5,000 you can subtract from your gross income level when you and/or your accountant are figuring out your tax return over the next couple of months.
2. Higher Debt Limits
There are limits as to how much the federal government will allow you to deduct for your mortgage interest, but this year, they increased that cap. As of 2013, you can deduct the interest on the first $1.1 million in mortgage debt. Yep, you're reading that correctly. As long as your home (or homes, if you own more than one) has a mortgage worth $1.1 million or less, you can deduct the interest paid on the loan from your taxes. If you're married, but file separately from your spouse, each of you can only write-off up to $550,000 – but when you combine those two figures, the household is still eligible to deduct interest paid up to the $1.1 million threshold.
3. Discount Points
If you're a first-time homebuyer, discount points and how you can deduct them from your taxes might be confusing. Hopefully, we can clear up any confusion for you! When you purchase a home, the lender might offer you the option of paying discount points. This is a form of pre-paid interest on the loan that lowers the interest rate on the mortgage. You can deduct these from your taxes one of two ways, depending on the deal between you and the lender. If you paid the discount points in full at the time you closed on the home, you can deduct them in their entirety from your taxes for that year. That can add up to a huge write-off! However, if you and the lender agreed that you will pay the discount points over the life of the mortgage, you'll be forced to spread those deductions as long as you're paying on the home.
4. Itemized Deductions
Once you purchase a home and deduct the interest paid on the mortgage as a write-off, you can no longer file a standard deduction. Since an interest write-off is considered an itemized deduction, you might as well go ahead and itemize all of your other deductions, and write them off as well. It might sound like a whole lot of extra effort, but it can add up to a whole lot of extra savings! After all, itemized deductions can include any charitable donations, tax preparation fees, unreimbursed work expenses, and state and local income taxes.
Who knew being a homeowner could make tax season so much fun?!
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