Unless you’re hiding from the IRS in some undisclosed safe house right now, chances are you’re reading this feeling pretty good about the fact that you filed your taxes in time, and made it through the stress and uncertainty for another year. Way to go! You’re #adulting. But, 2017 tax season will be here before you know it, and if you’ve bought a home or are considering buying one this year, you should know there are some benefits when it comes to the “T” word.
First thing’s first: To qualify for these benefits, you will need to do an itemized deduction on your Federal Tax Return, not a standard deduction. A federal standard deduction is a fixed dollar amount that you can deduct from your taxable income and is based on filing status and age. The itemized deduction is a little bit more complicated, but It’s worth the extra time spent prior to filing your taxes.
Here’s the breakdown on your return.
Deduction 1: You mortgage interest on your primary residence: In a majority of cases, your mortgage interest is fully deductible. Homeowners can write off interest on up to a $500,000 loan for a single tax filer, or a $1 million loan if you file jointly. Homeowners can also deduct interest paid on up to $100,000 of home equity debt, even if that money isn’t spent on home improvements.
You will receive a 1098 Form each year stating how much mortgage interest you have paid throughout the year. You or your CPA can use this number as the mortgage interest deduction amount to use on your tax returns.
Deduction 2: Mortgage interest on a second home: The interest you pay on a second home mortgage is also deductible under certain circumstances, so make sure you’re not missing out on an opportunity here.
If you have a second home that you do not rent out during the year, you can deduct the interest you pay on your mortgage. If you rent out your second home during the part of the year, it could still qualify. The rules say, you need to use the home more than 14 times per year OR more than 10 percent of the number of days that the house is rented out per year—whichever is longer.
Deduction 3: Private Mortgage Insurance: If you purchased a conventional loan or a FHA 20 percent down, chances are that you’re paying private mortgage insurance or a mortgage insurance premium each month, respectively. This monthly insurance payment typically ranges from $85-$200 per month, depending on your loan amount.
When filing your taxes, you can deduct borrower paid conventional private mortgage insurance or FHA mortgage insurance premium on both home purchases and refinances, as long as your loan is secured by the same residence. If you’re part of a household with an income of $100,000 or less, you can deduct 100 percent of your private mortgage insurance premium. Each addition $1,000 of household income will reduce your deduction by 10 percent, up to an income of $109,000” says Travis. “If your adjusted gross income is more than $109,000, you cannot deduct your private mortgage insurance or mortgage insurance premium.
Deduction 4: Property Taxes: Your deductible property taxes include those paid at closing when buying the home, as well as the taxes paid to your city or county each year. You can deduct property taxes for your main home, vacation home, land and foreign property, according to Travis.
Most homeowners pay property taxes as part of their monthly loan payment. The money paid towards property taxes goes into an escrow account for payment.
If you pay through your mortgage payment each month you are only able to deduct it after the lender has paid for it on your behalf.
What about points: Some homebuyers pay “points” that are expressed as a percentage of your loan amount.
Points are also known as discount points in the mortgage industry and they are fees paid directly to a lender, such as TowneBank Mortgage, at closing in exchange for a reduced interest rate which in turn reduces your monthly payments. You can deduct points the year you paid them, as long as the points were paid to your primary residence, and the payment of points is an established business practice in your area.
The information contained herein (including but not limited to any description of TowneBank Mortgage, its affiliates and its lending programs and products, eligibility criteria, interest rates, fees and all other loan terms) is subject to change without notice. This is not a commitment to lend.
TowneBank Mortgage is not a tax consultant. Contact your tax advisor for more details.