Real Estate

Tax Return – Home Mortgage Interest Tax Deduction

How Homeowners Can Get The Maximum Tax Refund.

Owning a home. Ask any landlord what’s good about owning rather than renting, and most will say “tax deductions!” That’s correct because all homeowners who itemize their taxes can deduct 100% of their mortgage interest and property taxes from their income tax returns. But how do you get the maximum tax refund for homeowners? If you don’t already own a home, there may be good reasons, but the benefits of owning it far outweigh the rent. There are really only two reasons for not owning a home: you may be living rent-free with your parents or friends, or you may be planning to move in 3 years or less. Even if you are single, but plan to stay in the area for more than 3 years, consider buying a home.

The main tax incentive for owning a home is that it allows you to deduct the interest you pay on your mortgage. This is usually the biggest tax cut for most people, because a significant amount of your home payment goes to interest during the first few years of a mortgage. What are the top benefits of owning a home when tax season rolls around?

Deductible mortgage interest that includes “points” when you buy your home.

Deductible property taxes on your return.

Deductions for improvements made to your home when you sell.

Up to $ 500,000 in tax-free capital gains when you sell your home.

To get the maximum tax refund for homeowners, you will need to use Form 1040 and itemize your deductions. If you are in a 28% tax bracket, the government effectively subsidizes about a third of your loan costs, making your home more affordable. Plus, your closing costs and points are tax deductible, and hundreds of thousands of dollars of any capital gains you make when you sell your home are exempt from income tax.

At the time of taxes, it is essential to know what you are entitled to, in order to claim it. So, here are five essential tax tips to get the maximum tax refund for homeowners.

1. Complete the long form at least once and learn how to itemize your deductions.

Nearly 40% of homeowners lose number one tax benefits each year when they do not itemize their income taxes. If you own a home and otherwise have a fairly simple return, it might be tempting to just take the standard deduction or file Form 1040A. In some cases where your mortgage, property taxes, and income are low enough, the standard deduction may be a higher deduction than your itemized deductions. But you will never know unless you fill out both forms at least once.

So before you start filling out Form 1040A or 1040EZ, gather your documentation and answer the questions about tax software like TurboTax, which will automatically do the math on whether itemizing or taking the standard deduction will result in the lower tax bill.

Why the extra work? You can only pay less tax, never more if you fill out the longer Form 1040.

2. Home office deduction.

The average home office deduction is over $ 3,000. Of course, there are special IRS rules about what you can claim as a home office. The space that you claim as your home office cannot be exempt from capital gains tax when you sell your home. Visit the IRS.gov website for complete details.

3. Tax relief for loan modifications, foreclosures, and short sales.

The Making Home Affordable ® (MHA) ® Program is an important part of the Obama Administration’s comprehensive plan to stabilize the US housing market, helping homeowners obtain mortgage relief and avoid foreclosure. To meet the diverse needs of homeowners across the country, Making Home Affordable ® programs offer a variety of solutions that can help you take action before it’s too late. You may be able to refinance and take advantage of today’s low mortgage rates and lower your monthly mortgage payments.

While long-term housing prospects began to improve in 2011, loan modifications are expected to peak this year. Distressed homeowners who are on the verge of a short sale, loan modification, or foreclosure should be aware that typically, any mortgage balance that is erased by one of these outcomes is taxed as what the IRS calls Cancellation of Debt Income, or CODI.

Under the Mortgage Forgiveness Relief Act of 2007, the IRS is currently not collecting income taxes on CODI incurred through a loan modification, short sale, or foreclosure on most residences until 2012. But the banks are taking many months, or even years, to settle new mortgages. If you see any of this happening in your future, don’t procrastinate. Get free advice from a housing expert at MakingHomeAffensible.Gov. or call 888-995-HOPE (4673) to speak with an expert.

4. The tax consequences of a refinance or property tax appeal.

Homeowners around the world are working to claim a lower property tax bill based on recent years’ decline in the value of their homes. Those with equity have tried to refinance their existing home loans at rates of 4% to 5% for the past few years. These strategies offer some of the biggest savings today. But here’s a little caveat for homeowners who can cut these costs. Property taxes and mortgage interest, the very costs you’re minimizing, are also the foundation of the top tax benefits of owning a home. So plan ahead for your tax deductions to go down along with your taxes and interest.

5. Don’t forget about closing costs.

If you bought or refinanced your home, you may be concentrating on mortgage interest and property tax deductions while completely forgetting about closing costs. Remember that any opening fees or discount points paid to your mortgage lender at closing are tax deductible on your return. When you finance a home, you can pay what are called “points.” Points lower the interest rate on your mortgage by prepaying a portion of the interest at closing. The borrower pays the points to the lender as part of the loan agreement, and they are a percentage of the loan. Points can also be called loan origination fees, maximum loan charges, loan discounts, or discount points. If you can’t find out exactly what you paid, look up your HUD-1 settlement statement. It’s full of line item credits and debits that you should have received from your escrow provider or title attorney at closing.

Helpful hint: 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 have purchased a single family home, townhome, or condo, tax breaks are available to you. It’s time to get familiar with the tax forms because that is where you will need to provide all the details about your new tax deductible expenses.

Don’t forget PMI premiums on your tax return. PMI are private mortgage insurance premiums on certain mortgages. If you make a down payment of less than 20%, you are generally required to have private mortgage insurance. This type of insurance is paid for by the buyer, but protects the lender in the event that the borrower defaults on the loan. PMI premiums can be deducted if the mortgage was issued after 2006. This deduction can be changed in 2012, so check the IRS website for current information.

Final thought: There are also big tax savings on the profit when you sell. If you are going to live in your home for at least 5 years, consider buying a home for this reason alone. 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 have a profit of up to $ 500,000 on the sale and you will not have to pay taxes on the profits. If you are single, you can earn up to $ 250,000 without paying any federal taxes. There’s only one catch: You must own and occupy your home for at least two out of the last five years. Visit IRS.gov for more information.

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