It’s often the most dreaded time of the year: tax season. Maybe you’ve handed off your tax return to a CPA or tax preparer, or maybe you’ve decided to tackle it yourself. But with such complicated tax code, and so many itemized deductions to remember, it is not uncommon overlook a deduction you may qualify for. Isn’t that what all these “second look” or “free tax return reviews” are all about?
Well, if you are a homeowner, there are many deductions you may not know you qualify for. The most popular deduction–the mortgage interest deduction–is often taken by homeowners; but lesser-known deductions such as tax deductions for settlement costs, property taxes, selling costs, mortgage insurance costs, home office spaces, and construction/home improvement loan interest, are sometimes overlooked.
In addition to these eight common tax deductions for homeowners, don’t forget to include work-related moving expenses, landlord deductions (you can write off mortgage interest, depreciation, property taxes, maintenance costs, and property management costs), and tax credits for energy appliance upgrades.
Mortgage interest paid at settlement
Take a look at your closing statement; one item that’s generally listed there is home mortgage interest. On a mortgage of up to $1 million, you can deduct the interest that you pay at settlement if you itemize your deductions on Schedule A (Form 1040). This amount should be included in the mortgage interest statement provided by your lender.
Did you pay points in order to obtain your home mortgage? These fees are included on the income tax deductions list and can be deducted as long as they are associated with the purchase of a home. If you refinanced your home, these points are still deductible, but it must be done over the life of the mortgage.
As long as they are based on the assessed value of the real property, you can deduct your state and local property taxes. However, if your money is being held in escrow for the purpose of paying property taxes, you cannot claim this deduction until the money is actually taken out of escrow and paid. If you do this, check your Form 1098 for the amount you may deduct. Be aware that if you receive a partial refund of your property tax, the amount of the deduction you can claim will be reduced.
If you sold a home in the past year, you may be able to reduce your income tax by the amount of your selling costs. These costs can include things such as repairs, title insurance, advertising expenses and broker’s fees. The IRS only allows the deduction of repair costs associated with selling if the repairs were made within 90 days of the sale. It’s also crucial that the repairs were made with the intent of improving your home’s marketability. Selling costs are deducted from your gain on the sale.
If you use a portion of your home exclusively for the purpose of an office for your small business, you may be able to claim a deduction on your taxes for costs related to insurance, repairs and depreciation. You may only claim this deduction if the space within your home is used exclusively and regularly as either your principal place of business or a place where you meet and deal with customers or patients. You may also be able to take advantage of this deduction if a portion of your home routinely is used for storing items (product samples, inventory, etc.) used in your business.
In tax year 2010 (the most recent year for which figures are available) nearly 3.4 million taxpayers claimed the home office deduction.
Mortgage insurance premiums
You may be able to deduct the premiums paid for private mortgage insurance for your principal residence and for a non-rental second home.
The deduction begins to phase out once your adjusted gross income reaches $100,000 ($50,000 for married filing separately). In general, you can deduct the premiums paid for the current tax year only. A qualified tax adviser can provide information about rules for mortgage insurance provided by the Federal Housing Administration, Department of Veterans Affairs and Rural Housing Service.
Home improvement loan interest
If you’ve taken out a loan to make improvements on your home, you may be able to deduct the interest on this loan. Qualifying loans are those taken out to add “capital improvements” to your home, meaning the improvement must increase your home’s value, adapt it to new uses or extend its life. New carpeting or painting are not considered capital improvements, while adding a garage, installing a water heater or building a deck are all examples of capital improvements.
Construction loan interest
If you take out a construction loan to build a home, you may qualify to deduct the interest. The IRS only allows a deduction for mortgage interest if the loan relates to a “qualified” home, which means it must either be your principal residence or a vacation home that you will use for personal purposes. You can only use this deduction for the first 24 months of the loan, even if the actual construction takes longer.
via “Own a Home? Check Out These 8 Tax Breaks” at Zillow.com
Remembering to include these homeowner tax deductions can mean more money in your pocket for 2013. If you are lucky enough to come out with a small (or large) chunk of change, consider using it to upgrade or improve your home. A small investment in your home can mean a large investment in your home’s future value.