Tax guide

Tax Breaks for Homeowners

Buying gives a great feeling of starting a new chapter in life, of having “arrived.” But make no mistake, owning a home is a huge financial responsibility, probably the biggest you’ll ever have. Besides the mortgage payments, there’s insurance, property taxes, maintenance costs, the list goes on.

The federal government knows just how big a deal owning a home is, so the tax law provides several ways for your home ownership costs to cut your taxes. Certain expenses are deductible, provided you itemize deductions. Let’s look at some of these deductions.

Deducting Mortgage Interest

If you’re making monthly mortgage payments for your home, you may be able to deduct the interest on your payments. You may qualify for the interest deduction on up to two qualifying homes. To be eligible to deduct the interest:

  • You must have taken a loan to buy, build, or seriously improve a home.
  • The loan must also be secured, meaning that you signed a mortgage agreement, deed, or land contract. If you got the loan from family or friends, they must take the legal steps to secure the loan, or you can’t deduct the interest.

Note: Beginning with 2018 returns, there are now different maximum loan amounts rules, depending on the loan date:

  • For loans secured before December 15, 2017, you may deduct the interest if the combined mortgages, for either one or two homes, is $1,000,000 or less. If married filing separately, the maximum home debt is $500,000.
  • For loans secured on or after December 15, 2017, the maximum is $750,000 ($375,000 for married filing separately).

You should receive Form 1098 or a similar document from your mortgage lender stating how much interest you paid for the year. So when you do your taxes on, just fill out the Form 1098 screen. If you didn't get a Form 1098, instead fill out the Deductible Mortgage Interest screen. Just fill out one of the screens for the same loan, though.

Deducting Home Equity Loan Interest

You may also be able to deduct interest paid on a home equity loan, provided the loan is to buy, build or substantially improve your home. You may deduct the interest if the loan does not exceed $100,000 (if married filing separately, the maximum is $50,000).

Borrowing against your home for any other purpose, such as repaying credit card and various other debts, is no longer deductible.

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Deducting Real Estate Taxes

Note: Real estate tax is also deductible, but beginning with 2018 returns, the total of all state and local taxes is limited to $10,000 ($5,000 if married filing separately. Included in this total are state and local income taxes, real property taxes, and personal property taxes.

The tax for your home is often included in your mortgage payment. Your mortgage holder will hold the tax amount for you until it’s time to pay the tax, and will make the payment for you. If this is the case, the mortgage holder will send you a statement showing how much real estate tax was paid for your property.

As with home mortgage interest, enter the real estate tax on our Form 1098 screen (or the Interest You Paid screen if you didn’t receive a Form 1098).

Private Mortgage Insurance

Private mortgage insurance (PMI) premiums are deductible as part of the mortgage interest deduction. The deduction begins to phase out at $100,000 in AGI, and phases out completely once AGI reaches $109.000. If married filing separately, the phaseout begins at $50,000 and phases out completely at $54,500.

The PMI deduction had expired at the end of 2017, but has been extended through the 2020 tax year.

Deducting Points

A point refers to certain charges paid or treated as paid by you to get a mortgage. Your mortgage documents should list the charges that are included.

When deducting points, you have a choice: you can either deduct them all at once, for the tax year paid them, or you can stretch them out, deducting a percentage each year you have the mortgage.

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