It’s that dreaded time of year again, taxes are due. No one enjoys forking over their hard-earned money to the government, but unfortunately there aren’t many ways around it. If you’re still breathing you’ll likely have to pay taxes. However, smart tax payers avoid some of these high levies by utilizing tax benefits. There are all kinds of tax breaks offered by the government. Among these breaks, many of the most substantial benefits apply exclusively to home owners. While buying a home is typically considered a wise financial decision, many people are shocked to find out how buying a home can save you big money on your taxes as well. Let’s take a look into a few of these tax benefits for home owners.
Mortgage Interest Deduction
This is the most commonly known tax benefit of owning a house. Any interest you pay on your mortgage counts as a deduction against your total income. So, when your monthly mortgage bill comes and you see those pesky finance charges, at least you know they will help a little come tax season. At the end of the year you add up every finance charge you paid and deduct that off of your total income for the year, thus owing less.
This is especially impactful for first-time homebuyers because finance charges are paid most heavily at the start of the loan. As time progresses, a larger percentage of your monthly payment goes to paying off the principle. However, in the early stages of a mortgage, the majority of the monthly payment goes towards interest. Thankfully you can write this off against your total income when it comes time to pay taxes.
This deduction was a topic of concern with the 2018 tax reform. The good news is, the new laws don’t affect this deduction as much as some people thought. The new law says if your mortgage is over $750,000 than you cannot take this deduction. While this may be an issue for some people who have jumbo loans, the vast majority of homeowners will be unaffected.
Property Tax Deduction
One of the biggest tax benefits for first-time homebuyers is property tax. As long as the home is your primary residence, you can typically deduct any property taxes you paid on that house that year. This will bring down your total taxable income similarly to the mortgage interest deduction.
This deduction also saw major changes with the 2018 tax reform. In the past, you could deduct both state and federal taxes paid on your house. However, the new regulations roll both taxes into one “SALT” tax. SALT taxes are then limited to a total deduction of $10,000 for both single and married homeowners. Again, this will not affect the vast majority of Americans. Nevertheless, if you live in a nice house in an area with particularly high property tax, this may change your deductions.
Tax-Free IRA Withdrawals
Having enough money saved for a down payment is a major problem for many first-time home buyers. Did you know that you can withdraw money from your IRA tax free? The money does have to go toward a down payment, but still this can be a huge benefit to prospective home buyers.
Let’s say for example you had an IRA with a modest amount of money in it. Typically, you wouldn’t be able to touch this money for a long time without incurring large fees and taxations. But when it comes to buying a home, the government gives you a break on these regulations.
Saving money for a down payment and closing costs is a major consideration for most people when they’re getting ready to buy a home. The IRS says you can pull funds from your IRA to help.
According to Lisa Greene-Lewis, a CPA and blog editor at TurboTax. “First-time homebuyers who break into their IRAs to come up with the down payment do not have to pay the 10 percent penalty normally applied to withdrawals taken before age 59½,”
When buying a home, you can withdraw as much as $10,000 from your IRA without penalty. Unfortunately, you will still need to pay taxes on this money. A 401k plan is not subject to the same exceptions as well.
Home Improvement Tax Breaks
Making improvements on your home can actually provide you a tax break in the right situations. Especially if you pay for the improvements with a use a home equity loan. In this case, you can get the same type of deductions from the interest on this loan as you would on your regular mortgage.
Another tax break is available if you make improvements to a house and sell it. Typically if you sell a house for more than you pay for it, you’ll have to pay capital gains tax on any money you make. However, you can actually lower the amount of money that is considered capital gain if you paid for home improvements.
Say for example you sold a house and made $70,000 profit. But in order to sell that house you spent $10,000 remodeling the kitchen. On your taxes you would only be responsible for paying capital gains tax on $60,000. Make sure you save your receipts for any work or materials! (Keep in mind this is a generalized example and will differ on a case to case basis)
Home Efficiency Tax Credits
Depending on where you live, you may be eligible for certain clean energy and home efficiency tax credits. These credits are great because you will get to upgrade your house with the latest technology and reap the tax benefit for doing so! The most common example of this would be a tax credit received from installing low flow toilets. Different deductions and incentives apply to all sorts of things such as solar power and even energy efficient lighting. Home owner’s in Colorado can enjoy a variety of benefits from green energy initiatives.
While there are too many to list in this blog check out this link for a complete list of programs offered here in Colorado.
How Do I Afford A Home?
Have you been considering buying a home but don’t know where to start? Don’t worry, you actually have lots of options. From down payment assistance programs to government grants, there are numerous programs to help young people make the big move toward home ownership. And surprisingly it’s not even difficult to qualify. At The Blake Team, we have your back. Our first-time home buyer specialists know the in’s and out’s of these numerous programs. They will guide you through the process every step of the way and make sure you get the absolute best program available to you. Let us show you just how easy buying your home can be. Contact us today to find out how you can make your dream of owning a home a realty!