Tax Deduction Checklist: Things You Should Know
Who says paying taxes isn't fun? Well, it isn't, but it is our solemn duty to do our part, right? In any case, there are certain loopholes that make it legal for you to minimize the amount of tax you have to pay without getting in trouble with the IRS. This is especially the case if you are a homeowner, as you are privileged to enjoy certain tax deductions. Familiarize yourself with the most common tax breaks and see how far you can go at minimizing your taxes. Here they are:
The interest you pay on your mortgage is tax-deductible for loans of up to $1 million. Be prepared to itemize your deductions to take it, but it's worth it especially if you just bought a home. Most mortgages are structured with payments paying off the interest first, so if you bought a $300,000 home with a fixed-rate 30-year loan @ 4% interest, that's $10,920 in deductions!
Private mortgage insurance
Buyers who weren't able to make a 20% down payment on their home are required by lenders to pay for private mortgage insurance or PMI. Use this additional expense to your advantage by declaring it as a tax-deductible item, especially if your gross income is less than $100,000. Each $1,000 you make after that, 10% of your PMI can be deducted (up to $109,000). PMIs are generally 0.3% to 1.5% of the annual loan amount, so if it's a $300,000 loan, the deduction could be anywhere between $900 to $4,500.
Individuals who have recently invested in or refinanced in a home in 2016 are likely to have paid points, or fees that you pay when taking out a loan. Points are paid to lower your interest rate and/or cover origination fees. Each point is 1% of the loan amount. For a $300,000 loan with 2 points, that's a $6,000 deduction.
Remember though, that refinance points have to be amortized over the life of the loan. For a similar loan amount, a 30-year fixed mortgage will deduct $200 a year for the next 30 years ot until you sell the property.
Home Improvement Loan Interest
Aside from deductions on your mortgage interest, certain deductions are also applicable to your tax payables if you recently took out a HELOC or home equity loan. Such loans are used for home improvement and can be used to deduct up to $100,000 of interest on that loan. For a $50,000 loan on 15-year home equity loan @ 7% interest, that's a $3,157 deduction on the first year.
The property taxes you pay are tax deductible. Rates may vary from 0.28% to 2.38%, but the general idea is that you can minimize your tax payables further with tax you've paid for your property(ies).
Yes, going green rewards you in more ways than you can imagine! The IRS has no set upper limit to crediting you for doing your part to save the planet. For solar panels, fuel cells, solar water heaters, etc., that's 30% tax credit ($9,000 for a $30,000 energy-efficient upgrade). For qualifying roofs, insulations, doors, windows, and skylights, that's an additional 10% credit. Biomass stoves, air source heat pumps, etc. can give you $300 credit. Get acquainted with the list of qualifying energy efficient upgrades to maximize your resources and tax deductibles.
Home Office Deduction
If you work from home and you have a dedicated home office in your residence, good news! The home office deduction has recently been simplified to $5 a square foot, up to 300 square feet. No more worries about utility bills or keeping receipts. That's $1,000 in deductions for a 200 sq.ft. office. Make sure though, that the area is strictly for your workspace. You might get into trouble if an auditor comes and sees a crib or treadmill in your home office.
Home Sale Exemption (if you sold your home last year)
Individuals or couples who have sold their homes for a profit in 2016 can benefit from tax-free capital gains-- $250K for individuals or $500K for married couples who file jointly. Money spent on home improvements can also be included in your home's tax basis. For a $500,000 home with $200,000 spent in improvements, that's a $700,000 worth of tax basis. If you sold the home for $900,000, you'll pay NO TAXES on your $200,000 profit.
All the same, you need to make sure that you work closely with your accountant to make sure you're putting in all the right deductibles. Don't be too excited with your newfound tax loopholes. File properly, file responsibly, and enjoy your savings!
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