5 Great Tax Breaks for Homeowners
Editor's note: A previous version of this article incorrectly listed a tax break for manufacturers, not for homeowners. The Fool regrets the error.
Most homeowners are familiar with the fact that mortgage interest can be deducted come tax time, but the tax benefits of owning your home go way beyond that.
There are several obvious and not-so-obvious tax breaks that are available to homeowners that can help keep the IRS out of your pocket. \Here are a few you might be able to use.
1. Mortgage interest and points
Since I already mentioned it, let's take a look at mortgage interest and points. Mortgage interest is deductible as long as the taxpayer's total itemized deductions are higher than the standard deduction, and as long as the mortgage is on a primary or second home (no investment properties). There is also a $1 million debt limit on which to take the deduction.
Also, if you took out a new mortgage this year and paid points, they are deductible in the year they are paid, as long as the new mortgage was for your main home.
2. Property taxes
Real estate property taxes are also deductible, and this is one that is not quite as well-known as mortgage interest. These can be deducted whether you paid them at the closing of your loan or if you pay them to the taxing authority in your jurisdiction. However, make sure there aren't any non-qualifying expenses rolled into your tax bill. For example, in my county, homeowners pre-pay their sewer bills for the year through their tax bill, and this portion of the bill cannot be deducted. Refer to your most recent tax bill for a breakdown of the total amount.
3. Mortgage insurance
This one actually expired on January 1st, meaning 2013 is the last year to take advantage of this. Mortgage insurance is generally required when a homebuyer puts less than a 20% down payment on a new mortgage. This can be deducted on your 2013 taxes, but you can only deduct the full amount if your adjusted gross income (AGI) was under $100,000 for the year, and the deduction phases out entirely above AGIs of $110,000.
4. Home office
If you work from home, the home office deduction can definitely save you some money. Even if you are not 100% self-employed, if you use any part of your home to earn money, you may qualify. Check with a tax professional to see if your particular situation qualifies for a deduction.
The IRS offers two ways to calculate the home office deduction, and you should try both methods to see which gets you the bigger deduction. The simpler method is to simply take the square footage of your office space and multiply by $5.00, up to a maximum deduction of $1,500. The more complicated method lets you deduct actual expenses as a percentage of your home's size, which can be much larger than the easy method, especially if you live in an expensive area.
For example, if your home office is 150 square feet, and your entire home is 1,500, you should be able to deduct 10% of expenses like utilities, home maintenance, and other whole-home expenses, not to mention 10% of your housing payment itself.
5. Did you make your home more energy efficient?
If you made certain improvements to your home in 2013 that made it more energy-efficient, you may be eligible for a tax credit (not just a deduction). For things like roofs, water heaters, windows, and doors, you can qualify for up to 10% of the cost, up to $500. For major projects such as a solar energy system for your home, you can get a credit of 30% of the cost, with no upper limit!
Are you ready?
These deductions and credits can add up quickly for homeowners, particularly in high cost-of-living areas of the country. A homeowner with a $350,000 FHA (3.5% down) mortgage could have around $14,000 in mortgage interest, $3,500 in real estate taxes, and nearly $4,000 in mortgage insurance to deduct. The deduction could be even better if the homeowner is self-employed and works out of the house.
While it is unlikely every single possible deduction and credit will apply to you, many homeowners qualify for more tax breaks than they may think.
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