Five Key Tax Related Tips for First-Time Homeowners
Buying a new home can be a very exciting and rewarding experience. While first-time homeownership can come with a lot of initial expenses, it can also come with some nice money-saving tax breaks. As tax season has rolled around, new homeowners would be wise to take advantage of available tax breaks on their recent purchase. If you are a first-time homeowner, here are five key tax tips you'll want to consider.
Tip #1: Consider the Possibility of Itemizing Your Home Mortgage Interest
If you choose to itemize your deductions, you may be able to deduct the mortgage interest you've paid throughout the year. Homeowners may deduct the interest paid on the first $750,000 in mortgage debt for homes bought after Dec. 15, 2017, or $1 million for homes bought before then.1 Depending on your interest rate and loan amount, this could make it worthwhile to itemize your taxes instead of taking the standard deduction. The 2017 Tax Cuts and Jobs Act raised the standard deduction significantly. For 2021, the standard deduction was $12,550 for single filers or $25,100 for married filing jointly.2
Tip #2: Research the Availability of Energy Tax Credits
When purchasing a new home, you may decide to buy items to improve your home either shortly after your purchase or over the span of homeownership. While many improvements can work toward increasing your home's value and your equity in the home (think kitchen and bathroom remodels and finishing a basement), home improvements can also help you save on things such as energy costs.
Due to concerns about the environment and energy use, the government offers homeowners tax credits when they make certain improvements that reduce the energy use in the home. These are referred to as energy tax credits and can cover such qualifying improvements as energy-efficient skylights, doors, windows, new roof and insulation systems, heat pumps, furnaces, water heaters and even some qualifying air conditioning systems. Energystar.gov is a great resource to explore what improvements qualify and learn more about the program.
Tip #3: Review What Property & Real Estate Taxes Are Deductible
If you choose to itemize your deductions, you may be able to deduct at least a portion of taxes paid throughout the year. Single filers can deduct up to $5,000 (or $10,000 for married filing jointly) of property taxes, sale taxes or state and local taxes paid on eligible properties during that tax year.3
Your property taxes may come directly from your escrow account, especially if it's your first year owning the home. If this is the case, you'll receive a Form 1098 from your mortgage company at the end of the year. Your lender is required to send this information to you by the end of January, so be sure to study your January statement from your mortgage lender carefully, as Form 1098 may be part of, or attached to, your regular monthly mortgage statement.
Tip #4: Determine if Any Mortgage Points You Paid are Deductible
Some mortgage companies may require points to be paid during the loan process. These points are a percentage of the loan amount that is prepaid interest required to secure your loan. If the collateral that is put up against the loan is your home (which is most often the case), the points are deductible on your return. The amount that you will be allowed to deduct for the year will most likely be listed on your Form 1098. If not, it will be a line item on your settlement statement as origination fees or points.
Tip #5: See if Your Home Office Qualifies You for Deductions
If your new home serves as a base for your business or has a space that qualifies as a home office, you may be able to write off some of your home expenses such as some of the utility costs, repairs, insurance and even the space you use to operate your business. To make sure that you are making appropriate deductions under a home business, it may be best to consult with a tax professional to see what qualifies.
Enjoy your new home and take advantage of all the perks homeownership has to offer by following the five tax tips for new owners listed above to maximize your deductions and get the most out of your return.
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This content is developed from sources believed to be providing accurate information, and provided by Kelly Financial Planning. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.