FIRST TIME HOMEBUYERS A FEW FEDERAL TAX BREAKS YOU SHOULD BE AWARE OF
A TAX-SAVING GUIDE FOR FIRST-TIME HOMEBUYERS
Buying your first home? While it’s certainly a rewarding experience, it can also be an overwhelming—and expensive—one. The good news is that the federal government offers several valuable tax breaks once you own a home.
Here are key federal tax breaks we want to make sure you’re aware of:
Mortgage Interest Deduction
The Internal Revenue Service (IRS) allows you to deduct the interest you pay on your mortgage. This deduction is generally worth the most in the early years of home ownership because mortgages typically require that you pay more interest in the first years of the loan. Over time, those interest payments gradually decrease as the loan principal payment increases.
The deduction is available on up to $1 million in mortgage debt if you’re married, filing taxes jointly and $500,000 if you’re a single filer. It can only be taken for mortgages on a primary residence or a second home.
You must choose to “itemize” your federal deductions in order to take advantage of the mortgage interest deduction rather than claim the standard deduction. (For tax year 2015, the standard deduction is $6,300 for individual taxpayers and $12,600 for couples filing jointly.)
Itemizing—which essentially means claiming individual deductions you’re eligible for rather than taking the standard deduction—often makes sense if you are still paying interest on your mortgage. That’s because all the federal tax deductions available to you will likely add up to more than the standard deduction you qualify for.
For example, if you took out a $400,000 mortgage with a 4 percent interest rate, you would pay nearly $16,000 in interest in the first year of that loan, according to the mortgage calculator on Bankrate.com. Those interest payments would gradually decrease over time, but you would still have to pay property taxes and have other costs that qualify for tax deductions.
To claim this deduction, be sure to file away the year-end statement that comes from your lender showing how much mortgage interest you paid that year.
Property Tax Deduction
You can deduct property taxes from your federal taxes too. As with mortgage interest, you must itemize in order to claim this deduction. Your local government should send you a statement each year showing how much property tax you paid that year, so you can claim that amount on your tax form.
If your mortgage requires you to pay points—fees you pay upfront on your mortgage in exchange for a reduced interest rate—you can claim deductions for those, too.
Adding Them All Together
While one single deduction may not add up to more than the standard deduction, multiple itemized deductions can quickly exceed it—especially in the early years of owning a home.
Beyond the deductions available to homeowners, you may also claim itemized deductions for your charitable donations, student-loan interest, expenses of starting or running a business and a host of other things. If you work exclusively from home, you may also qualify for a home office deduction. (Keep in mind that homeowners can also qualify for tax credits by making certain energy-efficiency upgrades to their homes.)
An accountant or tax preparer can help you identify and review all the various deductions you’re eligible for and explain what documentation you need to keep in your tax files.
The strategies mentioned in this document will often have tax and legal consequences; therefore, it is important to bear in mind. Always speak to your accountant or tax advisor.