Tax Benefits for Home Owners
Home Tax Deductions
Owning a home is the American dream. But did you know it can also be a taxpayer's dream?
There are many tax benefits for homeowners, such as the ability to deduct your mortgage interest and real estate taxes.
In addition, if you work from home you may be able to deduct expenses related to your home office.
This lens will help you make the most of the home tax deductions and credits available to you.
The Homebuyer Tax Credits
There are only a few months left to take advantage of the homebuyer tax credits. There are two credits available to people who purchase a new home in 2010.
The first is the First Time Homebuyer Tax Credit. For people who have not owned a home within the last 3 years, they may be eligible for a tax credit up to 10% of the purchase price of a new home. The maximum credit is $8,000.
People who already own a home may qualify for the Move-Up/Repeat Home Buyer Tax Credit. If you have owned and resided in your home (must be your primary residence) for at least five consecutive years of the eight years prior to purchasing your new home you may qualify for a credit of up to $6,500 (10% of the purchase price).
Will there be a $15,000 home buyer tax credit? Probably not. A provision was introduced in 2009 that would increase the first time home buyer tax credit to $15,000, as part of the 2009 economic stimulus package. Unfortunately the $15,000 credit didn't make it into the final stimulus package, but the credit was replaced with the $8,000 first time home buyer tax credit and the $6,500 repeat home buyer credit discussed above.
This is just one example of home owner tax benefits. Read on for more, including the real estate tax deduction, the home office tax deduction and more.
Home Owners Can Deduct Property Taxes Even If They Don't Itemize
[Note: This deduction was for 2008 and 2009 only. In order to deduct real estate taxes in subsequent years, you must itemize your deductions.]
One of the largest home owner tax deductions is the real estate tax deduction. Starting in 2008 home owners can deduct their real estate taxes paid even if they don't itemize, which makes this deduction for home owners even more valuable
The Housing Assistance Tax Act of 2008 passed earlier this year allows homeowners to claim an additional standard deduction for property tax if the taxpayer does not itemize. The additional amount is limited to $500 or $1,000 for joint filers.
This deduction will probably help senior citizens who have owned their homes for a long time (and thus have paid their homes off and therefore don't have enough deductions to itemize) the most, but it could also help out new home owners as well.
This is a temporary deduction, available only for 2008 and 2009 taxes.
One of the biggest tax breaks for home owners is the interest they pay on their mortgage each year.
You can deduct the interest you pay on a mortgage for your main home or a second home. Loans that qualify for this deduction include:
* A mortgage to buy your home
* A second mortgage
* A line of credit
* A home equity loan
Caution: If the loan is not a secured debt on your home, it is considered a personal loan and the interest you pay isn't deductible.
In addition to the mortgage on your main home, you may be able to deduct interest paid on a second home. However, you can't deduct interest on a mortgage for a third home, a fourth home, and so on.
There is a limit to the amount you can deduct. You can only deduct the interest on loans up to:
* the fair market value of your home, or
* $1 million ($500,000 if you're married and filing separately from your spouse),
For more information on deducting the interest on your home mortgage, refer to IRS Publication 936: Home Mortgage Interest Deduction.
Home Energy Tax Credits Back Again
The energy credit was resurrected once again. Taxpayers can take a credit for energy efficient items such as a new furnace or a new air conditioning unit on their 2012 tax return. For more information on what qualifies for the 2012 energy credit please visit www.EnergyStar.gov.
Another huge tax benefit for homeowners is the ability to take a tax credit for improvements made to your home. In 2006 and 2007, if you made energy efficient improvements to your home - such as installing a new furnace or new windows - you were allowed a credit on your tax return. This credit expired on December 31, 2007, but has been resurrected for 2009 only.
The credit is for 10% of the purchase price of energy efficient products that meet certain criteria. The maximum credit is $500, of that $500 only $200 can be used for new energy efficient windows.
Here are some examples of home improvements that could qualify for the credit:
* exterior doors and windows,
* storm windows,
* metal roofs,
* central air conditioning and heating,
* geothermal heat pumps,
* hot water boilers, and
* advanced main air circulating fans
Real Estate Taxes
The second biggest tax deduction for homeowners is generally the real estate taxes they pay on their home.
Generally, you can deduct annual taxes based on the assessed value of your property.
* Your mortgage interest statement may list the amount of real estate taxes you paid if you use an escrow account with your lender to cover real estate taxes and homeowner's insurance.
* If your real estate taxes aren't included in escrow payments made with your mortgage payments, check with your county tax collector to determine how much you paid for property taxes during the year (you should get a statement and/or a receipt showing this information once a year).
* Be sure to pick up any real estate taxes included on your settlement or closing statement as well.
Your real estate taxes paid should be deducted on Line 6 of Schedule A, which is then attached to your Form 1040.
The Housing and Economic Recovery Act of 2008
On July 30, 2008, President Bush signed H.R. 3221, the Housing and Economic Recovery Act of 2008 (the "Act").
The Housing Act is intended to revamp the housing finance industry, encourage home ownership and help prevent foreclosures. Below is a summary of some of the tax provisions in the bill that will affect current and future home owners:
* The Hope for Homeowners Program: The Act creates a new Federal Housing Authority (FHA) program designed to help borrowers in danger of losing their homes to foreclosure. Eligible homeowners may be able to pay off their original (foreclosing) lenders with a fixed-rate, 30-year-term mortgage for up to 90 percent of the appraised value of the property. Eligible homeowners are those who originated their loans before January 1, 2008, spend more than 31 percent of their monthly income on their mortgage, and are currently in danger of foreclosure. Borrowers would have to share future equity with the FHA. The program is completely voluntary; banks may elect not to participate. The program begins on October 1, 2008 and ends in September of 2011.
* Temporary mortgage foreclosure protection for military members: The Act provides mortgage foreclosure protection for members of the U.S. Armed Services by temporarily increasing (through December 31, 2008) the maximum loan guarantee for VA loans. The period a lender must wait before initiating foreclosure proceedings after a service member returns from service is extended from 90 days to 9 months. Increases in mortgage interest rates above 6 percent are suspended during the period of service and for one year after a service member ends service. This provision will sunset on January 1, 2011.
* Temporary tax "credit" for first-time homebuyers: First-time homebuyers of a principal residence purchased after April 8, 2008 and before July 1, 2009 may take a refundable tax credit of 10 percent (up to a maximum of $7,500; $3,750 for married persons filing separate returns) of the purchase price of the property. The credit is phased out for individual taxpayers with adjusted gross incomes (AGIs) ranging from $75,000 to $95,000 ($150,000 to $170,000 if married filing jointly). However, taxpayers must repay the credit taken over 15 years in equal installments as a surcharge on their annual income tax return.
* Temporary standard property tax deduction for taxpayers who don't itemize their deductions: For 2008 only, taxpayers who do not itemize their deductions will be allowed to take a real property tax standard deduction (in addition to the standard deduction) of up to $1,000 if married filing jointly ($500 for all other filers).
* Reduced homesale exclusion for nonqualified use: For sales and exchanges of a principal residence after December 31, 2008, the $250,000 ($500,000 if married filing jointly) homesale exclusion won't apply to the extent the gain is allocated to periods (not including any period before January 1, 2009) during which the property is not used as the principal residence of the taxpayer or the taxpayer's spouse.
These are just a few of the provisions in the new act. For more information, please visit 'Housing Rescue Bill...'
Tax Benefits of Owning a Home on YouTube
Home Office Tax Tips
If you have a home based business, eBay, or online business, one of your biggest tax deductions may be your home office. Here are some tax tips to help you get the most out of your home office.
Qualifying for the home office tax deduction:
Your home office qualifies for the home office tax deduction if it is your principal place of business, and you use it regularly and exclusively for business.
To pass the 'place of business' test, your home office must be the principal place you conduct your business, or a place where you regularly meet with clients or customers, or it must be a separate structure not attached to your home.
Regular and exclusive use means that you spend at least 10-12 hours per week conducting business in your home office, and that you don't use this room for other purposes. For example, if you use part of the room as a laundry room or children's play room you may not qualify for the home office deduction.
A good example of a home office that would qualify for the home office tax deduction is a spare bedroom that is used only to operate your home
based or online business out of. A poor example of a home office - and one which probably would not qualify for the home office tax deduction - is using your dining room or kitchen as a home office.
Deducting PMI Insurance
PMI Insurance is private mortgage insurance, and it applies to people who purchase a home with less than a 20% down payment.
Historically, people have grumbled and groaned about PMI insurance, but thanks to the Tax Relief and Health Care Act of 2006, there is less reason to grumble.
Homeowners who purchased a home (it must be their primary residence or a second home) in 2007 can, for the first time, claim a tax deduction on PMI premiums paid.
While this provision was originally set to expire at the end of 2007, the PMI deduction has been extended to include premiums paid in 2008 through 2010.
You have to itemize your deductions to claim the PMI deduction. On Schedule A, Itemized Deductions, you'll see the section called "Interest You Paid". This is where mortgage interest and loan points are claimed. You will claim your PMI payments on line 13, which was added just for qualifying mortgage interest premiums paid.
There is no limit on the amount of PMI premiums that you can deduct, but the deduction may be limited if your income is too high. For taxpayers with adjusted gross income of $100,000 or higher (including Single, Married and Head of Household taxpayers), the deduction starts phasing out and is eliminated entirely if your AGI is above $109,000 ($54,000 if you are filing Married Filing Separately).
While this provision will probably only help a small percentage of taxpayers, it is a welcome deduction for new home buyers who aren't able to put down a 20% down payment on their new home.
IRA Withdrawal for First Time Home Purchase
Q. I am making my first home purchase. Can I take money out of my IRA to help with the down payment?
A. Generally, withdrawals from a traditional IRA before the age of 59 Â½ are subject to income tax and a 10% penalty. There are several exceptions to the 10% penalty, one of which is a distribution for a first time home purchase.
You can take up to $10,000 from your traditional IRA to purchase your first home without incurring the 10% penalty.
There are some rules to keep in mind, however:
1. The purchase must be for a principal residence - qualified costs include costs to build, buy or rebuild a home.
2. The person purchasing the residence must be the IRA account owner or a family member (within limits).
3. To qualify as a first-time homebuyer, you must not have owned a home at any time during the two years prior to the IRA withdrawal. If you are married, your spouse must also meet this requirement.
4. The 10% penalty exception only applies to the first $10,000 you withdraw from your IRA (this is a lifetime limit) - if you are married and both spouses qualify as first time homebuyers, you can each withdraw $10,000 from your IRAs penalty free.
5. You must use the IRA funds within 120 days of the withdrawal to qualify for the exception.
IRS Circular 230
Disclaimer: Any tax advice contained in this message is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law. It is strongly recommended that you get additional help from a (paid) tax professional who is familiar with your unique circumstances. In other words, don't take take advice from a Squidoo lens, or forum, or blog...