Common Tax breaks for Homeowners & Buyers and their Misconceptions

You might wonder, why am I talking about Taxes in January? There are couple of reasons, one to get you thinking about future taxes and plan accordingly if you are planning to buy a home this year. Other one is to get you all ready to file last year returns properly by educating about tax breaks. We all know Taxes are inevitable evil for our country’s economy and we should pay it but we are given one time chance to file the explanation in a tax return and allowed to get refunds if we are eligible for one. So by planning properly, you will not miss out that chance and at same time avoid any audits in future.

Let’s talk 5 important tax deductions/tax breaks that area relevant to home owners which you can avail if you do decide to itemize your taxes.

1. Mortgage interest deduction
If you own a home or planning to own one as personal primary residence, 100% of the mortgage interest paid before Dec. is deductible on that year taxes. For example, interest paid till Dec 2011 will be deducted in 2011 tax year return. In January, your mortgage lender will send you a form documenting the precise amount of interest you paid, although most lenders provide them online within few days after the year starts.

One item that normally appears on a settlement or closing statement is home mortgage interest. You can deduct the interest that you pay at settlement. This amount should be included in the mortgage interest statement provided by your lender or you can find it on the HUD-1 settlement statement you received from your escrow agent at closing. Misconception:Down payments can be deducted or can take write off. Earnest Money, Down payment, Insurance (other than mortgage insurance premiums), including fire and comprehensive coverage, and title insurance are not deductible.

2. Property tax deductions
If it’s your primary residence(living most part of the year), you should be able to deduct 100% of the property taxes you’ve paid to your state and/or local taxing agency this year. Many monthly house payments include an amount placed in escrow (put in the care of a third party) for real estate taxes. You may not be able to deduct the total you pay into the escrow account. You can deduct only the real estate taxes that the lender actually paid from escrow to the taxing authority. Your real estate tax bill will show this amount. Misconception: You cannot deduct HOA fees because homeowners association, rather than a state or local government, imposes them.

3. Closing/Settlement cost deductions
Misconception: New home or refinancing closing cost can be deducted. Most of the settlement cost or closing cost are not deductible. But Discount points and origination fees paid to your mortgage lender and/or broker at closing are frequently deductible, but there are rules around this, which tax software and/or professionals can help you make sure you meet. Specially, You cannot deduct transfer taxes and similar taxes and charges on the sale of a personal home..

4. Mortgage Insurance Premiums
You may be able to take an itemized deduction on Schedule A (Form 1040), line 13, for premiums you pay or accrue during 2011 for qualified mortgage insurance in connection with home acquisition debt on your qualified home. Mortgage insurance premiums you paid or accrued on any mortgage insurance contract issued before January 1, 2007, are not deductible as an itemized deduction. Misconception: Any insurance premiums are deductible. Not really, only PMI’s are deductible.

5. First time Home buyer Credit
In general, you may be able to claim the credit for a home purchased in 2011 if you are a first-time home buyer. You are considered a first-time homebuyer if you meet all of the following requirements,

  • You purchased your main home located in the United States: After December 31, 2010, and before May 1, 2011, or After April 30, 2011, and before July 1, 2011, if you entered into a binding contract before May 1, 2011, to purchase the home before July 1, 2011.
  • You (and your spouse if married) did not own any other main home during the 3-year period ending on the date of purchase.

Generally, the credit is the smaller of: $8,000 ($4,000 if married filing separately), or
10% of the purchase price of the home. Misconception: Anyone who bought the house in 2011 can get first time home buyers credit. See above for specific time period to qualify.

I strongly recommend either to get help from Tax preparer or CPA or use a good Tax preparation software like TaxAct or TurboTax which will take you through the life events to cover these items automatically. Also check out IRS Publication 530 for more info on Home owner tax breaks as well.

About Vijaianand Thirnageswaram

I am a Proud Realtor of Texas, trying to guide and help clients to find their dream home and educate them to buy them for right price. I am also a Candidate for CFP who has more financial knowledge which allows me share and educate clients in any financial decision making process.

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