Thursday, January 31, 2008

Tax Deductions For Homeowners

Tax time is upon us again already, but luckily, the Internal Revenue Service provides some perks to homeowners to compensate for expenses they may have incurred throughout the year with homeowner related tax deductions. Consult your tax advisor to find out which deductions apply to you, but here are some common deductions that may be beneficial to you. Property taxes Property taxes - the taxes charged by state and local governments on your property's value are usually tax-deductible. • You must have paid these taxes at closing, or to a taxing authority, either directly or through an escrow account, during the year. • Also, the tax must usually be based on the assessed value of the property and the taxing authority must charge a uniform rate on property in its jurisdiction. There are some exceptions to property tax deductions. Read IRS Publication 530, or consult your tax advisor for more information. Home mortgage interest The interest that you pay on a home mortgage is usually tax-deductible. You are allowed to deduct interest on multiple mortgages, as long as they add up to less than $1 million (up to $500,000 if married filing separately). You should receive a “Form 1098″ from your lender which details how much mortgage interest you paid. To claim this deduction, you need to fill out “Schedule A”, under “itemized deductions” to record your interest deduction. If you itemize your deductions, you can usually deduct the entire part of your house payment that's designated as mortgage interest. Interest is fully deductible on: • Mortgages secured by your main home or second home. • Mortgages used to buy, build, or improve your main home or second home. (Interest on mortgages used for other purposes is not deductible.) In addition, you can deduct: • Prepaid interest and points. Points are generally deductible in the year they are paid if the points are paid to acquire the property. If the points are paid for a mortgage refinance, the points must be deducted over the life of the loan. • Late payment charges on mortgage payments. • Mortgage prepayment penalty. • Redeemable ground rent. Tax deductions for Going Green Homeowners who make their homes more efficient with energy-conscious purchases may be eligible for tax benefits. A recent tax law change provides a tax credit to improve the energy efficiency of existing homes. The law provides a 10 percent credit for buying qualified energy efficiency improvements. To qualify, a component must meet or exceed the criteria established by the 2000 International Energy Conservation Code (including supplements) and must be installed in the taxpayer’s main home in the United States. The following items are eligible: • Insulation systems that reduce heat loss/gain • Exterior windows (including skylights) • Exterior doors • Metal roofs (meeting applicable Energy Star requirements) In addition, the law provides a credit for costs relating to residential energy property expenses. To qualify as residential energy property, the property must meet certification requirements prescribed by the Secretary of the Treasury and must be installed in the taxpayer’s main home in the United States. The maximum credit for all taxable years is $500 – no more than $200 of the credit can be attributable to expenses for windows. Read more from the IRS on how you may be eligible to receive this tax break. These deductions can be very important when it comes time to pay your taxes and can possibly save you a lot of money. Unfortunately, not all expenses related to homeownership are tax-deductible. These include: • Homeowners insurance premiums • Depreciation • Cost of utilities • Settlement or closing costs • Homeowner association dues and fees It is a good idea to always check with your tax professional as you may actually qualify for other deductions you were not aware of. To learn more information on taxes and being a homeowner, visit the IRS where you can learn more about Tax Information for Homeowners
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