The U.S. tax code can be intimidating, and many Americans have little desire to dig through receipts and IRS forms each spring.
However, 7So don’t let your fear of paperwork get the better of you.
When it comes to finding the most valuable tax breaks for Americans, “deductions related to your home will give you the biggest bang for your buck,” says Craig Richards, managing director and director of tax services at Fiduciary Trust Company International. Overlooking these breaks, he said, can cost you dearly.
Take the most common — a deduction for interest paid on your home mortgage. U.S. taxpayers collectively get a break to the tune of about $100 billion each year from this single item alone!
If you’re a homeowner, you have access to breaks like this and more, which can add up to significant savings off your annual tax bill. Here are a few of the biggest ones:
1. Mortgage interest. As mentioned, this is one of the most common breaks for taxpayers, and with good reason. Consider that a 30-year mortgage of $250,000 will result in almost $10,000 in interest payments over the first year at current market rates. And don’t forget your vacation home or the condo you bought for your aging parents, because you’re also allowed to use interest paid on your primary residence as well as one other home.
2. Real estate taxes. Another important tax break for homeowners is a deduction for local property taxes, which can be substantial depending on where you live. In many ways, Richards says, this is a more common tax break than even the hefty mortgage interest deduction. “There are lots of folks who own a home and don’t have a mortgage, but everyone’s paying real estate tax,” Richards says.
3. Mortgage insurance. Borrowers who do not have 20% equity in their homes are required to carry private mortgage insurance, or PMI, to protect the lender if the loan defaults. PMI typically costs 0.5% to 1% of the entire loan amount each year, so deducting those payments can add up fast if you have a large loan balance.
4. Mortgage points. A “point” on a home mortgage is a payment that equals 1% of your total loan amount, and is paid up front to a lender to reduce your total interest rate. Some borrowers choose to pay points to get a more favorable lending rate, and an added bonus is that they also get a tax break. Unfortunately, you can only deduct the amount of any points paid in the year that you paid them — so don’t miss this break if you’ve taken out a new home loan in the past year and paid points.
5. Casualty losses. If you’re unfortunate enough to suffer storm damage or a fire in your home, the IRS provides a tax break to offset some of those losses. You can’t double-dip, of course, and get a break for losses your insurance company has already compensated you for, but even folks with a decent homeowners insurance policy may still get some tax benefit. “If you get an insurance reimbursement, it doesn’t necessarily mean you’re not going to get anything,” Richards says. “It’s just going to reduce the total loss that you can recognize.” Doing some simple math on Form 4684 will let you know how much, if any, of your losses are tax-deductible.
6. Home office. If you are self-employed and have a home office that meets IRS standards, there may be significant tax benefits for you. For instance, if your home office represents 5% of your home’s total square footage, you may be eligible to deduct 5% off that property’s utilities, insurance and property taxes, and general repairs, among other things. Just remember there are strict rules around what constitutes a home office that sees “regular and exclusive use” — so consult Publication 587 or your tax professional to be sure you qualify for this deduction.
7. Cost basis. Single taxpayers can sell their primary residence for a $250,000 tax-free gain, and married couples can do so for a $500,000 gain. But if you’ve kept accurate records of capital expenses on your home, like putting on an addition or a new roof, you can increase the amount of tax-free gains above those limits based on what you’ve put into the property. A half-million dollars sounds like a lot, but over a 30-year mortgage, there may be significant appreciation in your real estate market, says Pete Lang, investment advisor at Lang Capital outside Charlotte. “A lot of people retire on the value of their home,” Lang says. However, “most people never keep a tax basis file on their home,” he adds. So even if you’re not using the documents from your capital improvements this year, you should hang on to them until you do sell the house.
8. Residential energy credit. The Residential Energy Efficient Property Credit gets you a 30% tax break on big-ticket systems like solar panels or a geothermal heating unit, as well as smaller amounts on items like water heaters. While these breaks are not as big as some of the others, the fact that they are a credit instead of a reduction is a big bonus. “Credits are dollar-for-dollar reductions in the taxes you owe,” Lang says. “A tax deduction is simply reducing your income, which is then applied to a tax rate, which is much less valuable.”
Source: USA Today