April 15 is a date dreaded by some. As what Anthony Hopkins said in the movie Meet Joe Black, the only things you can't avoid in life are "death and taxes". BUT, you can avoid paying for high income taxes.
Filing and paying for taxes should not be dreaded - especially for homeowners because they are entitled to many valuable tax deductions. All the deductions in the world won't do you any good unless you know how to take advantage of them. You do not want to pay taxes you don't need to pay.
Here are some information you need to know to maximize your deductions and avoid common tax deduction mistakes. You do not want to pay taxes you don't need to pay.
1. Mortgage Interest Deduction
Mortgage interest are paid during the first few years of the mortgage term. Through the home mortgage interest deduction, homeowners are allowed to reduce their taxable income by deducting the amount of interest paid on the loan which is secured by their principal residence. On a mortgage of up to $1 million, they can deduct the interest they've paid at settlement if they itemize their deductions on Form 1040.
2. Property Taxes
Property tax paid to the local municipality are deductible. The new home owner do not need to pay income tax on money that was spent on property taxes. However, money held in escrow for the purpose of paying property taxes are not deductible - until the money is actually taken out of escrow and paid the property tax.
3. Selling Costs
Selling costs on the sale of your home can be claimed as tax deductions. Closing fees, repairs, capital improvements costs, broker's fees and advertising/marketing expenses required to sell their home will be deducted on the gain on sale of their home. Provided that the repairs were made within 90 days of the sale. Maintenance items such as painting the home and changing the carpet are usually not considered as capital improvement.
4. Mortgage Insurance Premiums Deduction
Homeowners that paid less than 20% down payment on their homes are required to pay Mortgage Insurance Premiums or MIP to protect the lender in case the borrowers default on the loan. MIP payers can deduct those insurance payments as tax deduction when they file their returns.
5. Energy Efficient Upgrade/Repair Deduction
The cost of the building materials used for energy efficient upgrades can be deducted on the total tax payable, not just a reduction in the taxable income.
6. Home Office Deduction
Homeowners can deduct a percentage of their mortgage, utilities and repair bills dedicated their office space. However, the home office must be the primary office location of the business or it is used as storage area for your business (i.e. samples, inventory, etc)
7. Construction Loan Interest Deduction
If a home owner has borrowed money to build a home, he/she may qualify to deduct the interest. The interest deduction will only be applicable for the first 24 months of the loan even if the actual construction takes longer.
8. Home Improvement Loan Interest Deduction
There's also tax deduction on the interest on the loans used for home improvements. Home improvements like adding square footage, upgrading or repairing damage from a natural disaster are tax deductible. Painting a home or changing the carpet are not included in the capital improvement projects.
9. Profit on Sale of Real Estate Deduction
A homeowner can claim up to $250,000 of profit (for single individual) and $500,000 (for married couples) from the sale of the real estate property. Provided that the it is the primary residence of the homeowner/s and they have lived in it for two of the past 5 years.
This article can serve as a guide for filing your income taxes. If you have further questions, please contact our office and we can refer you to Tax Professionals to assist in your inquiries.
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