Real estate and home ownership is a huge part of our country’s economy. That’s why Uncle Sam has incentives to encourage Americans to purchase homes. He wants owning a home to be a help for you, not a burden.
Here are some tax incentives for home owners that you might not know about:
First-time Homebuyer Credit
As defined by the IRS, a first-time homebuyer is “any taxpayer who has not owned another principal residence at any time during the three years prior to the date of purchasing the home.” The original version of this federal tax credit terminated in 2010 for civilian homebuyers and in 2011 for homebuyers who were members of the military. However, there are other forms of the first-time homebuyer tax credit that still exist, such as the Mortgage Credit Certificate, otherwise known as the MCC.
Mortgage Credit Certificate (MCC)
The MCC allows homeowners to claim a tax credit on some of their mortgage interest paid. This amount is then used to reduce the amount of federal taxes the homeowner would pay to the IRS. The standard rate for the MCC is 20% of the mortgage interest paid annually.
Mortgage Interest Deduction
The interest paid on a mortgage can be added as an itemized deduction on a standard Form 1040, Schedule A. Assuming the itemized deduction is greater than the standard deduction, this can lead to substantial savings for homeowners, particularly in the earlier years of homeownership when the mortgage balance (and the mortgage interest along with it) is at its highest.
Mortgage Points Deduction
The IRS allows for the deduction of any extra charges paid by the homebuyer as a part of the closings costs for obtaining a mortgage. Origination points are not deductible because they are not extraneous charges; they are a part of the mortgage fees. By contrast, discount points are extra, and are tax deductible.
After the homebuyer obtains a mortgage, at the end of the year they will receive a Form 1098 Mortgage Interest Statement. The points paid to purchase the home will appear on the form in Box 2. The discount points can be deducted under “Schedule A” of a 1040 tax form. As with the Mortgage Interest Deduction, points can only be deducted if the homebuyer itemizes the deductions.
Energy Credits and Exemptions
The Home Energy Credit allows homeowners to recoup up to 30% of the costs of (with a cap of around $1,500) for installing energy efficient windows, doors, furnaces, air conditioners, heat pumps, hot water heaters, and more.
Mortgage Interest Credit Deduction
This is one of the lesser discussed tax deductions simply because it does not save homeowners as much money as some of the other deductions. But mortgage interest credit is an allowable deduction that should not be overlooked.
The simple description of the Mortgage Interest Credit is that it’s a credit designed to prorate your mortgage for the first month if it applies in that scenario. It allows new homeowners to get credited for interest whenever a mortgage closes and funds within the first five days of a given month.
IRA Penalty Exemption
For any individual who is buying, building, or rebuilding their first home, you have the opportunity to distribute $10,000 from your IRA if the money will be used towards expenses related to the home, including closing costs.
And finally, there are home improvement, home business deductions, as well as medical home improvement deductions available to homeowners who meet eligibility requirements.
As you prepare for this tax season or are considering buying a home, remember that there are many tax benefits that come with being a homeowner. While it might take a bit of research to uncover all of them, a good tax accountant can help you take advantage of all the deductions you may qualify for.
Skyline Financial Corp. and its loan officers are not tax advisors. Always consult a tax professional for details.Questions? Contact David Krushinsky Today!