One of the most common ways to surpass standard deduction limits on your tax return, thereby allowing you to save what can often be a large amount of federal taxes is to own a home and unlock the many deductions that come with home ownership. Many of these deductions are well known, but many homeowners are unaware of additional opportunities for savings.
These deductions are important for first-time homebuyers to understand because they can be the equalizing factor that allows them to own a home for the same net dollars out-of-pocket as they are currently paying in rent! Why rent and pay someone else’s mortgage when these deductions can allow you to build equity in your own home? For the 2013 tax year the standard deduction is $6,100 for single taxpayers and $12,200 for those married and filing jointly. There is no reason to itemize unless you can claim more than those amounts. For purposes of this discussion, it is important to understand that a deduction is an amount which reduces your taxable income. A credit is an actual reduction in the taxes owed.
Mortgage Interest: Claiming annual mortgage interest payments is one of the most common deductions. There is now a cap of $1.1 million in mortgage debt, but this cap can include multiple loans. If your primary residence is in Illinois and you have a second home in another state, you can claim interest on both up to the $1.1 million mortgage debt cap.
Private Mortgage Insurance: Private Mortgage Insurance (PMI) is also deductible. This insurance protects the lender should the borrower default on their mortgage and is commonly required by the lender if you put less than a 20% down payment when you purchase your home. This is not to be confused with Homeowner’s Insurance, which is not deductible, and which covers your dwelling and contents in the event of a fire, theft, etc.
Local and State Property Taxes: All local and state property taxes paid can also be itemized on your federal tax return.
Going Green: Unless Congress votes to extend tax credits for residential energy efficiency, 2013 is your last chance to claim up to $500 in green energy credits. These credits are for items installed such as insulation, energy efficient windows and doors, and high efficiency air conditioners and furnaces. This credit is not applicable if you have claimed it previously since initiated in 2011. A separate and more substantial credit is available for solar energy installations, as long as they are on your primary residence and not a rental property.
Selling Your Home Unlocks Tax Breaks: If you sold a home in the past year, costs including title insurance, advertising and real estate broker fees can also be claimed on your return. You can also claim certain repairs to reduce your capital gains on the sale, presuming they were made within 90 days of the sale and were done with the clear intent of marketing the property. If you had to find a new home due to a new job that is located more than 50 miles away from your old home, you may be able to deduct your reasonable moving expenses as well.
***** Always consult a tax professional with questions about whether these deductions apply in your individual situation. ******** Source: USA Today, Online 3/2/14