4 tax breaks for homeowners
Buying a home complicates your tax return but may provide savings. Mortgage interest, points and PMI are deductible, and you may get tax-free profits when you sell.
This post is from U.S. News & World Report.
There are two things you can count on when you become a homeowner: You get more tax breaks, and your taxes get more complicated. Whether you’ve purchased a single-family home, townhouse or condominium, tax breaks are available to you.
It’s time to get familiar with Form 1040 and Schedule A, because that’s where you will have to provide all the details about your new tax-deductible expenses.
To take advantage of these tax breaks, you have to itemize your deductions. If this is the best choice for you, here some of the expenses you can deduct:
Mortgage interest. Owning a home allows you to deduct the interest you pay for your mortgage. This is usually the biggest tax break for most people, because a significant amount of your house payment goes toward interest during the early years of a mortgage. You can deduct all the interest you pay unless your loan is for more than $1 million. This includes any interest you pay on a loan to buy your home and, with some limitations, the interest on a home equity line of credit or home equity loan.
There are two conditions you must meet to get this deduction. You must file Form 1040 and itemize deductions on that form's Schedule A. The mortgage is a secured debt on a qualified home in which you have an ownership interest.
Points. When you finance a home, you may pay what are called "points." Points lower the interest rate on your mortgage by effectively prepaying a portion of the interest at closing. Points are paid by the borrower to the lender as part of the loan deal, and they are a percentage of the loan. Points may also be called loan origination fees, maximum loan charges, loan discount or discount points.
Points are deductible as interest, but you generally can’t deduct the full amount in the year they were paid unless you meet certain requirements. If you aren’t eligible to deduct your points the first year, you can deduct them over the life of the mortgage. To determine if you are eligible, reference the exact guidelines provided by the Internal Revenue Service.
PMI premiums on certain mortgages. If you make a down payment of less than 20%, you are required to carry private mortgage insurance, or PMI. This type of insurance is paid for by the buyer but protects the lender in case the borrower stops paying on the loan. PMI premiums can be deducted if the mortgage was issued after 2006. This deduction is effective for premiums paid through 2011. There are no limits on the amount of PMI premiums you can deduct, but your income may reduce the deduction amount.
Tax savings on the gain when you sell. This one seems almost too good to be true. When you sell your home, the amount of your gain from the sale is tax-free if you meet the criteria. If you are married, you can earn up to $500,000 on the sale, and you won’t have to pay tax on the earnings. If you are single, you can earn up to $250,000 without paying any federal tax. There’s only one catch: You have to own and occupy your home for at least two of the past five years.
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Since the tax deduction for mortgage interest is most effective in the early years of the mortgage because the payments are nearly all interest, I think the deduction should stand but only up to a certain point, say when the payment is
a certain percent principal. The offset to this should be given to those of us retirees who no longer even HAVE a mortgage (thank goodness, but we've been paying for many years!) in the form of a tax break on our IRA distributions.
After all, we not only have paid off our homes, but we have saved for our retirement. We also are not getting much of anything on our investments which equates to no cost of living increases, so we shouldn't have to pay the same income tax rate, or worse yet, one that increased since we earned the money in the first place? I wonder why no one has ever talked about this. We are a large group, we seniors, and unless we earn something on our retirement savings, we
aren't going to be spending. The economy NEEDS our money!
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