Tax Season: Making the Most of Your Deductions
Tax season is officially underway, and for many homeowners that means one thing — maximizing your mortgage-related tax benefits. If you’re a homeowner, there are a number of ways you can save on your annual federal income taxes, whether you just bought a home in 2015 or you’ve owned it for years.
You should always talk to a reputable tax professional or accountant for the final word on what tax deductions you can and should claim as a homeowner. That said, here are five possible deductions to start thinking about now.
The Mortgage Interest Tax Deduction
There are typically four parts to a monthly mortgage payment: principal, taxes, insurance, and interest. The mortgage interest tax deduction continues to be one of the most popular tax deductions for homeowners. In part, that’s because the interest portion of your mortgage payment can occupy a sizable amount of your monthly payment. Bankrate points out it that for many homeowners it’s the biggest portion, and your cumulative interest can often surpass the standard deduction amount by year’s end, making it worthwhile to itemize your deductions.
That’s good news when it comes to tax time. With few exceptions, the amount of interest you paid on your home loan in 2015 is fully deductible when you file your taxes. One notable exception is for homeowners with mortgage loans exceeding $1 million. In their case, interest deductions are limited.
Note that the mortgage interest deduction isn’t just for your primary residence. Interest paid on a home equity loan or line of credit, a second home, even a boat or RV, can be fully deductible under certain circumstances.
The Private Mortgage Insurance Deduction
Originally scheduled to expire in 2014, the private mortgage insurance (PMI) deduction is still available to some homeowners. According to the IRS website, you can treat qualifying mortgage insurance premiums you paid in 2015 as interest — if the insurance is connected to home acquisition debt and the policy was issued after 2006.
While the PMI deduction will be available to many homeowners, there are limitations placed on tax filers as their income increases. For those with a gross adjusted income of more than $100,000 (or $50,000 if married and filing separately), the amount of PMI premiums that you may deduct is reduced. Should your income top $109,000, you won’t be able to take this deduction.
The Property Tax Deduction
Yet another deduction available to most homeowners is the property tax deduction. With most mortgages, you’ll pay a portion of your yearly property tax into an escrow account with each mortgage payment. Like mortgage interest, property tax payments can add up to a sizable sum over the course of a year.
For a home loan, the total amount of property tax you paid on your home in 2015 will be included on an annual statement from your lender. However, if you purchased the home in 2015, the home’s yearly property tax was likely split between the previous owner and you. You’ll only be able to claim a deduction for your share of the tax burden. This information can be found on your closing paperwork.
The Points Deduction
For those who just bought a home in 2015, you have the option of deducting the cost of points you paid to get a better interest rate on your home loan. As Bankrate points out, the only difficulty with this deduction is when it can be claimed.
Your loan must meet certain requirements to claim your points deduction for the tax year you paid them. The requirements include that the loan in question was to purchase or build your primary residence, that buying points are part of an established business practice for your region, and that the number of points you purchased was within a typical range.
If your loan doesn’t meet all these requirements, or the points are associated with a refinance loan, home equity loan, or a home equity line of credit, you can still take a deduction — it just has to be spread out over the life of the loan.
The Home Sale Exemption
For those of you who sold a home in 2015 for a profit, you also have the option of claiming certain tax benefits. In the past, the only way to avoid or lessen tax on profits from a real estate sale was the 1031 Exchange rule, which was itself limited to exchanging one piece of property for another under specified circumstances.
However, a 1997 law allows homeowners to exclude up to $250,000 of gains from a home sale for an individual homeowner (and up to $500,000 of gains for a married couple filing jointly) if the sale meets certain requirements.
According to the IRS’s Publication 523, your sale qualifies if you owned the home for at least two years and used it as a primary residence for two of the last five years. Homeowners are also able to claim a partial exemption of their real estate gains if they don’t meet these requirements but sold due to certain hardships.
The Cumulative Effect
These deductions can add up quickly for homeowners and really make a difference at tax time. Be sure to talk to your tax professional about these options and others early to give yourself time to gather your documentation and make for a stress-free experience come tax season.