For many Americans, purchasing a home is more than just setting out a personal goal. It is eliminating the need of renting. It is building equity in an investment that is proven to never die out – real estate. Getting into home ownership is often a battle as mortgage payments can be sky high. Uncle Sam is easing that burden for many homeowners.
Homeowners now have tax incentives that can lower their taxes owed substantially. Standard write-offs are for most people. Being a homeowner entitles you to more write-offs as you’ll be able to itemize now. This also means your state taxes and charitable gifts will gain you tax saving deductions as well.
One of the largest tax breaks for homeowners is deducting mortgage interest. Up to one million dollars of mortgage interest debt can be deducted used to purchase your home.
Your mortgage lender will automatically send you the Form 1098 – Mortgage Interest Statement. This will list your mortgage interest you paid for the previous year. The mortgage interest will be added to the Schedule A – Itemized Deductions form. Form 1098 must include any interest you paid from your home’s closing date to the end of the month.
If your lender does not include this amount, you can find this on the settlement sheet in your purchase paperwork. Your tax bracket will determine what the government will cover for you. For those in a 25-percent tax bracket, a $1,000 deduction will lower your tax bill by $250.
Tax Deductible Mortgage Points
To receive your mortgage, homebuyers typically pay “points” to their mortgage lender. The points are referenced as a percentage of the total mortgage loan. Once your loan is secured by your home and your points are the norm for your area, consider those points as a deductible interest. You, of course, needed to pay enough cash at the closing. Closing costs can be in the form of your down payment, and that can cover the cost. Let’s take the below example:
If you paid two points on a $200,000 mortgage loan, which is $4,000, you could deduct the points if you put $3,000 down at closing. Even if your seller is the one that paid the points, you will receive the credit as though it were you.
The above scenario is for someone who is purchasing a new home and getting a mortgage for the first time. If you were to refinance a mortgage, it works a bit differently. In regards to refinancing, you’d have to write this expense off over the duration of the new loan. For example, if you refinanced for a new 25-year loan, you would write off 1/25th a year. You will not be reminded to do this either so there will be no documentation coming out at tax time.