A Guide to Tax Deductions For Homeowners

A New Home Means New Beginnings…And New Deductions

by Elaine Nadalin

If you are planning to buy a home this year or have already done so, congratulations! Home ownership is one of life’s most significant rites of passage and can be one of the best investments you’ll make. Owning a home gives you a long-term stake in your community, stability,  and a new set of responsibilities. Home ownership is also a path to some great tax deductions that you’ve most likely already heard about. Here is a brief overview of some of these tax breaks. As with any tax matter, it’s always best to check with a qualified tax pro regarding your specific tax situation.

1098Home Mortgage Interest Deduction: At the end of the year, your mortgage lender will issue a 1098 form, which will disclose the amount of interest you paid for the year. This interest can be stated as an itemized deduction on Schedule A of your tax return. Box 1 of the 1098 form shows the amount of mortgage interest you paid.  Kind of takes the sting out of those mortgage payments, doesn’t it? You can deduct the mortgage interest every year you own your home.

Points of Loan Origination Fees Deduction: If you pre paid fees (points) to lower the interest rate when you purchased your home, you may be eligible for a tax deduction. Points paid to the mortgage company will be shown in box 2 of the 1098 form and can be itemized on your tax return. You may also find this amount reported on the mortgage settlement statement at the end of the year. A qualified tax pro can help you in determining exactly how much you can deduct.

Property Tax Deduction: This ongoing deduction is based on the amount of property tax you paid during the tax year. You can locate the amount paid by referring to your property tax bill. In some cases, some homebuyers will have an escrow account set up through their mortgage company for the payment of property taxes and insurance. You’ll find this amount in box 4 of the 1098. Be careful: the sum disclosed is a combination of all items paid by the escrow account, (taxes, insurance, etc.) so check with a tax pro who can help you decipher exactly what is deductible.

Home Equity Interest: If you took out a home equity loan or home equity line of credit, the interest on the first $100,000 borrowed can be deducted. For example, if you took out a home equity loan for $115,000, the interest on all but $15,000 can be deductible.

Medically Necessary Home Improvements: This deduction applies to homeowners who have had to make home modifications in order to care for themselves or a loved one. These modifications can include ramps, handrails, expanded doorways and halls to accomodate a wheelchair, lowered counters in the kitchen, specialized air systems, and support bars in bathrooms.

The tax code surrounding this deduction is complicated:  generally, improvements that exceed 10% of a homeowners Adjusted Gross Income could be eligible. Modifications that are not covered by insurance or other means are eligible, provided they meet the guidelines established by the IRS.  This is where sitting down with a tax pro will be to your benefit as the IRS has very specific guidelines for this deduction. Be sure to have a doctor provide a written explanation for the medical necessity of any health care-based home modifications.

As with any itemized deduction, be sure to keep copies of all cancelled checks, bills, and other documentation. You will need these at the end of the year when preparing to file your return. You may also need to provide them should your tax return be selected for an audit. Keep the documentation organized in a safe place where you can easily reach them when it comes time to file your taxes.

Home ownership, especially for the first time, gives you a chance to create a permanent place within your community and neighborhood, and a chance to create lifelong memories. Home ownership is also a long-term investment with a variety of tax deductions that are  available to you. Make sure you are aware of the deductions available to you, and you will get the most out of your investment.