Congratulations on your home purchase! Owning a home is a life-changing event that brings along additional responsibilities. Besides the occasional mowing of the lawn, shoveling of the driveway and decorating the house to suit your taste, you need to understand how your home purchase will affect your taxes going into the New Year.
One of the most compelling reasons for buying a house is that owning comes with a couple of tax breaks. Let’s have a look at some of the elements you should keep in mind.
Mortgage Interest Deduction
Tax breaks ease the cost of a mortgage. Homeowners that opt to itemize their deductions can deduct interest paid on a home mortgage from their federal income tax. If you bought a home in 2019, you could write off the interest you pay on up to a $750,000 mortgage. Most homeowners have mortgages lower than $750,000; therefore, won’t be affected by the cap.
HELOC interest can be deducted as well but must stay under the total limit of $750,000 and be used solely for home improvement. This is one of the most significant benefits to owning a home as you can take advantage of massive deductions at tax time.
Deductions can be made simple by carefully reviewing the IRS Form 1098 that is sent by your lender detailing the amount paid in interest on your loan on your tax return. Interest paid on home closing should be included as well.
The standard deduction is now $24,000 for married, joint-filing couples, $18,000 for heads of household and $12,000 for singles. It should be noted, however, that by itemizing your deductions, you’ll automatically forgo the standard deduction.
When a homebuyer takes up a mortgage, they are often charged costs by the lender. These are called origination points. The points are deductible as interest as long as the cash you paid at closing via your down payment is equal to the points. The deductible amount can be found on your 1098 form.
Energy-saving home improvements to your residence can earn you an additional tax break. If you make energy-efficient upgrades to your home, such as a geothermal heat pump or a solar energy heating system, you may qualify for a federal tax credit of 30% of the installation cost.
State and Local Tax Deduction/ Real Estate Taxes
The state and local taxes you pay, including property, sales, and income taxes are itemizable write-offs. You, however, can deduct up to $10,000 for all your state and local taxes combined (whether you’re single or married). It’s $5,000 per person if you’re married but filing separately. If you paid more than $10,000 last year in state and local taxes, you’d not be able to deduct the full amount. For those living in a high-tax area, this deduction cap is certainly an uncomfortable hit.
Home Equity Loans
The interest on home equity loans can be deducted, as long as the proceeds are used for renovations of the property on which the loan was taken. If the equity loan was used to pay off credit cards, pay medical expenses, take a vacation, or anything other than home improvements, that interest is no longer tax-deductible.
Understanding the tax impact of buying and owning a home can help you make a more informed decision. Additionally, it’s a good idea to ensure you’re consulting with a tax professional before making any serious deductions on your taxes.