Owning a home makes good financial sense for most Americans. Not only does it provide you with a place to call your own, each mortgage payment builds equity in appreciable property. With tax season approaching, it’s important to remember that home ownership comes with great tax benefits as well. The Congressional Research Service reports that mortgage interest deductions accounted for over $68 billion in savings for American taxpayers in 2012 alone. Here are some tax incentives to keep in mind if you own your own home or are thinking of buying one in the near future.
Mortgage and Refinancing Points
Tax breaks for people paying off mortgages and home refinancing account for a significant portion of tax incentives for homeowners. Points charged by your housing lender, usually equal to one percent of the principal amount of the loan, are calculated when the IRS determines how much tax you owe. Points can be deducted all at once for qualifying buyers, but most people have the points deducted over the life of their mortgage loan.
Mortgage Interest Deduction
These important tax deductions are designed to relieve the financial burden on homeowners who are paying off a mortgage. About half of American homeowners take advantage of these deductions, which save an average of $1,900 each year, per household. Interest paid on mortgages is tax-deductible, but the benefit begins to phase out if your household earns more than $100,000 per year. You can also deduct mortgage interest on a second home if the mortgage interest satisfies the same requirements as interest deductible on a primary residence. If you rented out the second residence in 2015, you must have used it for more than 14 days, or more than 10% of the number of days you rented it out, whichever is longer.
Nearly all property taxes you pay are tax deductible. However, associated fees such as paying for appraisals and consulting with attorneys may not be. As with mortgage interest, you can deduct the property taxes on a second residence, unless you rented it out from more than the greater of 14 days or 10% of the days in 2015. Ask an accountant or other financial professional if you have questions about property tax deductions when filing your taxes.
Qualified Mortgage insurance premiums you paid or accrued on any mortgage insurance contract issued after January 1, 2007, are deductible as an itemized deduction. This includes mortgage insurance provided by the Veterans Administration, the Federal Housing Administration, or the Rural Housing Administration, and private mortgage insurance (as defined in section 2 of the Homeowners Protection Act of 1998).
Energy-Efficiency Tax Credit
The IRS offers a $500 credit to homeowners who made improvements to their homes since 2014 to improve energy efficiency. These efforts include installing storm doors, insulation, and energy-efficient heating and cooling systems. You’ll have to act quickly to claim this credit, though—it expires at the end of 2016. Learn more about available credits here.
These are just the most common deductions for the typical homeowner. Full details on what you can and cannot deduct can be found on the IRS website. Consult with a tax professional to ensure you take full advantage of the tax benefits of home ownership. With so many ways to save on your annual taxes, now is a great time to become a homeowner.