Homeowners – Do You Know How to Handle Your Taxes? - A house is more than simply a place to live. It can give you a sense of security, piece of mind, and even a sense of pride. Recent studies have shown that, despite the recession, owning a home is still viewed as an important step towards fulfilling the American Dream. Buying a home, however, comes a few extra responsibilities that renters don’t have to worry about. From home repairs and yard work, to insurance and property taxes, homeownership takes a level of commitment. This time of year, one of those commitments is doing your taxes! So, do you know what Uncle Sam expects from you? More importantly, do you understand all of the financial benefits that come with purchasing your own home?
One of the biggest benefits when you buy a home is being able to itemize your deductions. Yes, that means having to deal with more paperwork than if you were taking the standard deduction. However, it leads to much bigger savings in the end. These specific deductions can lead to big savings, especially over the long term:
1. Mortgage Interest
The Mortgage Interest Deduction (MID) is considered one of the best tax breaks for homeowners, because it allows you to deduct the interest paid toward your mortgage. This can substantially reduce the amount you owe to Uncle Sam, depending upon your tax bracket. And luckily, this deduction was kept in place during the fiscal cliff negotiations earlier this year!
2. Property Taxes
You can also typically deduct the state and local property taxes you pay throughout the year, as long as they’re based on the assessed value of your property.
3. Private Mortgage Insurance
The Private Mortgage Insurance (PMI) deduction can really help people who are required by their lender to pay private mortgage insurance on top of their mortgage payments every month. PMI is more of a benefit to the lender, because it’s used to protect them in case you default – so it’s nice to know that you can at least deduct the expenses come tax time! This deduction was recently restored as part of the American Taxpayer Relief Act of 2012, which President Obama signed at the beginning of the year.
4. Energy Star program
The Energy Star program tax break was also recently restored. It’s designed to make homes more energy efficient. Through the Energy Star program, you can receive credit for making particular “Energy Star” improvements, like buying a new water heater, windows, roof, central air conditioner, or insulation that meets certain standards. You can usually deduct 10% of the money you spend on your improvements, up to $500.
5. Loan discount points and origination fees
Many new homeowners get the added benefit of deducting the points paid on their new mortgage loans. According to the IRS, loan discount points and origination fees are tax deductible to the buyer, regardless of who pays them. This has the potential of saving you money right in the beginning!
Buying a home should be an enjoyable process. While it is a huge investment and requires a serious commitment, if you keep excellent records during the buying process, you are likely to save some money. And, of course, be sure to check with your personal tax professional to see if there are other ways that your home can save you money during tax season.
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