- Real Estate
Tax Breaks For Home Owners
There are three levels of taxes that you are responsible for paying; federal, state and local. Federal and state taxes are based on your income. Local taxes are based on your property, and other things. If you own a home, you will have to pay property taxes to your city, town or village. What taxes you pay and what tax breaks you may be eligible for will be different from city to city, so you'll have to do your research to see what may be available to you.
On the state and federal level, you are paying taxes on your income. If you make $100,000 a year, you will have to pay a certain amount of money to your federal and state governments. A tax break comes in the form of a deductible or a credit. A credit is a fixed amount of money that is taken from your taxable earnings. As an example, if you qualify for a $500 tax credit then you only have to pay taxes on $95,000 of your income. A deductible is an amount that you can deduct from your total. For example, if you spend $10,000 on a home improvement and it is deductible, then you only have to pay taxes on $90,000 of your income.
The state governments and the federal government will attempt to provide deductibles for living expenses. Children, home ownership, car ownership, medical insurance, etc. In this way, they try to ensure that they are only taxing your disposable income, meaning the income that you have freedom to use in whatever way you wish. The key to paying your taxes will be to discover what expenses were needed for the upkeep of your life, and which weren't. For example, if you buy a new computer for work, you will most likely be able to write it off, meaning that the cost of your computer can be deducted from your taxable earnings.
The biggest tax break that home owners qualify for is a deductible on the interest you pay on your mortgage. When you buy a home, you usually can't pay for it outright. You put a certain amount of money down, anywhere between 10% and 40% of the price of your home, and borrow the remainder from the bank. The bank will charge you a certain percentage of your loan for borrowing from them, which is how loaners make money. This is called the interest. Usually you pay the interest along with the principal (the amount you borrowed) however, if you take out a 30-year mortgage, the bank often front loads the interest payments so that you pay the interest before paying back the principal. The federal government offers a tax break to home owners for the first 7 years in the form of a deductible on your interest payments. If you pay the bank $2,000 a month, and $1,500 goes to your interest, over the course of 12 months you will have payed $18,000 in interest. All $18,000 will be deductible. So if you earn $100,000, you will only have to pay taxes on $82,000.
The best way to discover other deductibles that you may be eligible for is to consult a tax professional. Tax companies such as H&R Block, make a business out of finding deductibles for their clients. The more deductibles, the less income is determined to be taxable by the government. You can also try to do the research on your own, by looking up tax forms or checking government websites to determine what tax breaks are in effect.