Home sweet home. Do you know what makes a home even sweeter? Tax deductions.
Uncle Sam wants you to be a homeowner. Both federal and state governments provide deductions for homeowners. The same can’t be said for renters. A report by the Institute on Taxation and Economic Policy listed only 21 states with any kind of renter’s deduction.
Let’s start with the basics. Remember, you can only deduct property taxes if you own the property and you are the one making payments. Make sure your name is on the title and loan.
Here’s another basic. You can begin researching home tax deductions by going to the Internal Revenue Service’s website at irs.gov. It is the most updated and reliable source for your tax questions and the IRS provides a treasure trove of information there that will save you thousands of dollars!
The First Deduction You Can Make
Before you even closed on your home mortgage, you should have received a HUD Closing Disclosure (it’s the law). A Closing Disclosure is a form that provides your mortgage loan’s final details including the loan terms, monthly payments, and your closing costs.
Be sure to read that Closing Disclosure carefully and bring it to your tax-preparer. Often, closing costs include real estate taxes and home mortgage interest. These are deductible for that tax year! You can read more about this in IRS Publication 530.
Deducting Mortgage Interest
You know that you can deduct the interest that you have paid on your mortgage. This is so important that the IRS publishes a 17-page booklet on the subject - IRS Publication 936. The amount of interest you pay each year will reported to you and the IRS on a year-end statement Form 1098.
The IRS generally allows you to deduct the mortgage interest paid on up to two personal homes each year. Uncle Sam believes in houses so much that the government will help you with two of them! However the total amount borrowed must be less than $1,000,000. This is more than adequate for the average homeowner.
Most Americans don’t own two homes. But you might own a timeshare. Timeshares are considered a second home. A timeshare can take 10 or 20 years to pay off, but the mortgage interest is deductible too.
Making Tax-Free Money on Your House
In her book “Deduct Everything,” the tax columnist Eva Rosenberg reveals hundreds of tax tips. For example, did you know your home can be a source of tax-free income? You can rent out your house or vacation property (like a timeshare) for up to 14 days each year without reporting the income. So say you’re taking the family on vacation, or maybe you can’t use your timeshare this year, then you just rent the place out tax-free. But 14 is the magic number! Anything more than 14 days, the rent income becomes taxable. See IRS Publication 527 for more details.
Home Improvements Could Be Deductible
Making your house more energy efficient could be tax deductible. Be warned: this tax credit is very specific about which efficiency improvements qualify. There is a “lifetime” tax credit for up to $500 (see IRS Form 5695).
Other home improvements deductions are trickier. Home repairs - which maintain your home’s quality - are not deductible. Home improvements - which increase your home’s value - have potential to be deductible, especially if you rent out a portion of your house or use part of your house for a home business (see IRS Publication 587).
Have a Tax Refund Check Ready?
So is your tax refund just burning a hole in your pocket? Buying a home - or just making home improvements - can make your refund work for you. A house is not just an asset, it can be the most important source of wealth you ever own.