Taking on a home loan does more than enable you to purchase a home. It can also save you a considerable amount of money at tax time. If you are thinking about becoming a homeowner, then it is worth your while to explore the tax benefits of a mortgage.
Exploring the Tax Benefits of a Mortgage
Why not take advantage of the tax benefits of a mortgage? The easiest way to lower your tax bill is to reduce your taxable income by transforming some of it into nontaxable income (source). This generally involves capitalizing on deductions and tax credits, and a mortgage can help with that. In fact, the following six tips can help homeowners reduce their taxable income.
1. Deductions for Mortgage Interest
Homeowners who itemize their deductions on Schedule A of their federal tax returns can normally deduct any interest resulting from a loan that is secured by their home and used to buy, build, or improve the home. The IRS refers to this interest as home acquisition debt, and it isn’t limited to primary residences. If you have a second home, you may be able to deduct the mortgage interest on that property as well. If you have a mortgage, you will need to check that you meet the requirements for this deduction. You should also be aware that there is a limit to how much you can deduct. According to the American Institute of Certified Public Accountants’ 360 Degrees of Financial Literacy, up to $1 million of home acquisition debt, or up to $500,000 if you’re married and filing separately, typically qualifies for this deduction. Are you curious about how much you could save? Using a mortgage tax benefits calculator can help you figure that out.
2. Deductions for Your Property Taxes
Property taxes are a fact of life for homeowners. Realtor.com reports that the average American household will pay more than $2,000 in property taxes each year. For those with mortgages, the cost of their property taxes is likely built into their monthly payment. However, paying property taxes tends to come with a silver lining. That’s because homeowners can normally claim their property taxes as a deduction on their federal returns. This is one of the best tax benefits of a mortgage.
3. Deductions for Your Closing Costs
Closing on a home comes with a laundry list of fees and charges, and some of those costs are tax deductible. Remember the points that you agreed to when you signed your mortgage paperwork? They’re sometimes referred to as loan origination fees, but whatever you choose to call them, you’ll definitely want to remember them at tax time. Points can be deducted from your taxes the first year that you buy your home, regardless of whether you or the seller paid for them. As the American Institute of Certified Public Accountants indicates, each point is generally worth one percent of the amount of the loan, so claiming one or more points can result in substantial savings on your tax bill.
4. The Pleasure of Tax-Free Imputed Rent
What do homeowners need to do to enjoy the benefit of imputed rent at tax time? The answer is simple: nothing. With most investments, the return that you receive is considered taxable income. Purchasing a home is an investment, and part of the return on that investment is the chance to live rent-free in your home. Economists refer to this as imputed rent, and it’s automatically considered nontaxable income. So while landlords must count any rent they collect as income and pay taxes on it, and renters are unable to deduct the rent that they pay from their taxes, homeowners can simply enjoy their savings. These savings add up. According to the Tax Policy Center, estimates from the Office of Management and Budget suggest the exclusion of imputed rent kept nearly $79 billion in the hands of taxpayers in the 2015 fiscal year.
5. Deductions for Home Equity Loan Interest
If you’ve used a home equity loan or a line of credit secured by your home to access your equity, the interest that you’re paying on this debt may be tax deductible. While it doesn’t matter what you’ve used the loan proceeds for, the deduction for home equity debt does have its limits. According to 360 Degrees of Financial Literacy, you are allowed to deduct the lesser of two possibilities. When claiming a deduction for home equity debt, you are limited to either the home’s fair market value minus its total home acquisition debt or $100,000 for a combination of main and second homes. If you are married and file separately, that drops to $50,000.
6. Access to Itemizing
When you do your taxes, you have the option of taking the qualifying standard deduction or itemizing. Generally, people opt for the standard option unless they have enough qualified expenses to make itemizing the better choice. As USA Today advises, owning a home just might be the thing that makes itemizing worthwhile. Although itemizing requires a bit more effort, it allows you to deduct a wide range of expenses that you might not otherwise have been able to claim. The more you can deduct, the greater the reduction in your taxable income, and the less you’ll owe when your tax bill comes due.
Are you ready to experience the joy of owning a home and to take advantage of the tax benefits of a mortgage? If you live in the Kansas City area, contact PrimeLending today. Our committed team will help you navigate the home-hunting process so that you can purchase the home of your dreams. At our branches located throughout Kansas City, we can help you explore our wide variety of loan products and programs. Plus, PrimeLending utilizes delegated underwriting, local appraisers, and cutting-edge technology to accelerate the underwriting and closing processes. We’re more than happy to navigate you through the process of buying your first home. When you’re ready to learn more, please give us a call at 844-701-5626.