The excitement of becoming a homeowner often overshadows certain important things such as tax breaks and credits. Are you a new homeowner? Yes? Then ‘tax breaks on new homes’ can be a cherry on the cake for you since you can save money on your new home. So, you must be aware of some important rules enacted by the IRS and the tax credit laws that are formulated for the first-time home buyers. Here you go:
Are you a first-time home buyer?
Getting a tax break on your new home is not always a cakewalk. You need to meet certain criteria to become eligible for tax benefits. The HUD (U.S. Department of Housing and Urban Development), the Government agency of housing has executed some criteria. If a person meets any of the criteria, then the individual will be considered as a first-time home buyer. The criteria are as follows:
Difference between tax credit and tax deduction
Lisa Greene-Lewis, a certified public accountant in San Diego, California, said that many people think that the terms ‘tax credit’ and ‘tax deduction’ are synonymous. She said, “a tax deduction reduces your taxable income, but your actual tax reduction is based on your tax bracket. A tax credit is a dollar-for-dollar reduction in the taxes you owe.”
Can tax credit save you more money?
Lisa Greene-Lewis explained, . According to her, "a tax credit of $100 would reduce your tax obligation by $100 while a tax deduction of $100 would reduce your taxes by $25 if you are in the 25% tax bracket."
Tax credit laws for first-time home buyers
If you are a first-time home buyer, then you shouldn’t miss the tax credit for what you’re eligible. According to the revised Worker, Homeownership, and Business-Assistance Act of 2009.
If you have purchased a home as your primary residence in 2008, 2009, or 2010, then you can become eligible for first-time home buyer credit. However, the eligibility varies from the year of your purchase. As per the new law,
Find out the restrictions that are there for homes purchased after November 6, 2009:
Can property losses give you a tax break?
When natural calamity or man-made catastrophes come, the one thing that you worry about is how to reduce the tax burden. Yes, you can get tax benefits like tax breaks for disaster damage to homes and other properties. However, you have to cross many hurdles to get the tax break for the losses.
The IRS has enacted some rules like:
- You’re not eligible to get a tax benefit if your property has already gotten insurance coverage.
- If your property is partially insured, then you’re eligible for the partial tax benefit.
- The value of the property must be above $100.
- For a single person, the standard deduction is $5,950. For couples (jointly filing), the deduction is $11,900 for a qualified loss on the basis of “fair market value".
. You must check out the value of your losses with the help of this workbook, before applying for the tax break for disaster, casualty, and theft cases. Get the workbook here.
How can you know the total amount of your credit?
You can use First Time Homebuyer Credit Account Look-up at irs.gov to get the account information and the total amount of your credit. Click here.
Interesting tax benefits for new homeowners
Claire Bisignano Chesnoff, president of SIBOR, said, “there are many social and personal benefits of owning a home, but some of the most significant financial benefits only become apparent at tax time.” He said, many homeowners who have owned their home for years can get some tax benefits. Thus, he warned all home buyers to become updated as the deadlines to the tax filing approaches. So, take a note of the tax breaks that you qualify for being a new homeowner. Hurry! Don’t miss out these cool tax breaks and credits for your new home this tax season.
1. Mortgage interest
For homeowners, their biggest tax break is the mortgage interest deduction. . You’re eligible for mortgage interest deductions on first or second mortgage considering that money is used in repair works or for paying a tax bill of your home.
2. Real estate or property taxes
Property tax deduction helps to scale down your taxable income. As per recent reports, “you may be able to deduct up to 100% of your property taxes due and paid or up to $10,000, whichever is less.” If you’re due for your payment, then your lender pays the taxes from your escrow account. .
3. Home office deductions
If you work from home or run your own business from home, you’ll get home office deductions. This deduction is calculated on the basis of the percentage of your home utilized for office purpose.
4. Mortgage insurance premiums
If you fail to pay back the loan, the mortgage insurance premiums act as a security deposit for the lender. You are qualified for a deduction for mortgage insurance premiums if you’ve taken a mortgage in 2007 or after.
5. Mortgage points
With the help of mortgage points, you’re able to pay a lower interest rate on your loan. “A point is equal to 1% of your mortgage amount or $1,000 for every $100,000.” You’re eligible to deduct points and the amount of interest paid in the same year you buy your home.
6. Sales taxes
Most of you are well aware that you can claim state and local income taxes as a deduction. You can also claim a deduction on sales tax if it’s greater than the amount of income taxes. Do you know you can save money if you pay sales tax on building materials for your new home? . If you’re one who lives in states that levy income and sales tax, then you must first decide which tax deduction is greater. Go to the IRS website and use an online calculator to calculate your maximum sales tax deductions.
Read more: Little known ways to reduce property taxes
7. IRA penalty exemption
You can avoid the IRA early withdrawal penalty if you use that money to buy, build, or rebuild your first home within 120 days of the withdrawal. For each spouse, you can withdraw a penalty-free IRA distribution up to $10,000, that is $20,000 for couples. You can only qualify for this if you and your spouse have not owned a home for the past two years.
8. Home improvements
Even if you won’t get deductions on home improvements, you can add the home improvement costs to the price of your home. This would help you when you have to pay taxes on the net income from the sale of your house. So, if you’re making improvements in your new home, then you must keep a good record of the expenses.
9. Ground rent
In the U.S., you would discover rare situations where the original owner still owns the land below your house after you’ve bought it. Here, you own the property above the ground and pay rent on the ground. . You’re eligible for a ground rent deduction if you have been paying the rent monthly or yearly and as long as the lease is for more than 15 years.
10. Private mortgage insurance
You can qualify for a private mortgage insurance deduction like those required on FHA loans on your tax return. Remember, the qualified mortgage insurance premium deductions are reduced in case your adjusted gross income (AGI) is now over $100,000. And, if perhaps it’s over $109,000 you’re not eligible for the deductions. Therefore, you can’t ignore that limitation if you’re hitched and filing separately since the deduction starts to be reduced at $50,000 in AGI and dies out at $54,500.
11. Home equity loans
As you have built up enough home equity, you might want to take out a loan against it to buy a car or pay your kid’s college tuition. Regardless of how you use the money, you can get deductions on interest up to $100,000 of home equity debt as mortgage interest.
12. Mortgage credit certificate
When you’re filing taxes, the . This helps the lower-income individuals to afford homeownership. So, before applying for a mortgage, make sure you get a Mortgage Credit Certificate (MCC) from your state or local government. You can also use an IRS form 8396 to figure out your credit.
13. Residential energy credit
If you want to make your new home a bit greener, then you can save your dollars through the Residential Energy Efficient Property Credit. You can save up to 30% on tax credit if you install solar panels, geothermal heat systems, wind turbines, and so on.
14. Mortgage debt forgiveness
President Obama, on 18th December 2015, has signed a bill that extends the Mortgage Forgiveness Debt Relief Act up to 31st December 2016. If you don’t get qualified for mortgage debt forgiveness, you can take advantage of the IRS insolvency clause and avoid paying taxes on forgiven debt.
Your dream of homeownership can be beautiful if you can save big. This is possible only if you take advantage of the above tax breaks. So, before filing taxes, just consider these tax deductions and credits to save your pocket from bursting.