Tax Deductions When Owning a Home
How Deductions Work
In the tax world, there are deductions and there are credits. Credits represent money taken off of your tax bill. Think of them as coupons. If you get a $500 tax credit, your tax due will go down $500. A tax deduction reduces your adjusted gross income, which in turn reduces your tax liability. Here’s how it works: If you’re in the 25% tax bracket your tax liability will be reduced by 25% of the total claimed deduction. So if you claim a $2,000 deduction you can expect your tax liability to drop by about $500.
Types of Deductions
Most of the favorable tax treatment that comes from owning a home is in the form of deductions. Here are the most common deductions:
Unless your case is that rarest of rare cases, you can probably deduct all of your home mortgage interest. There are some exceptions: for example, there is a $1 million yearly cap on the amount you can deduct, but chances are this won't apply. In many instances, you can even deduct late fees.
In January, after the end of the tax year, your lender will send you IRS Form 1098, detailing the amount of interest you paid in the previous year. Be sure to also include any interest you paid as part of your closing. Lenders will include interest for the partial first month of your mortgage as part of your closing. You can find it on the settlement sheet. Ask your lender or mortgage broker to point this out to you. If it’s not included on your 1098, add this to your total mortgage interest when doing your taxes.
Real Estate Taxes
The money you pay in property taxes is deductible, too. If you pay your taxes through a lender escrow account, you’ll find the amount on your 1098 form. If you pay directly to your municipality, you will have personal records in the form of a check or automatic transfer