By Chris Potter - StockMonkeys Contributor
The United States government incentivizes home purchasing by including numerous tax benefits or tax breaks for home purchasers. The most common of these tax benefits is deducting mortgage interest from your adjusted gross income. There are additional tax incentives which you should be aware of the to get the most benefit from your recent home purchase. As with most tax transactions, not everything associated with a home purchase is tax-deductible and it is important to understand the difference to avoid paying penalties or fees.
Deducting mortgage interest is the most common benefit of a home purchase and is applied to your taxes by using a Schedule A form. Single filers who own a home qualify for a standard deduction of $5,000 while married couples get a standard deduction of $10,000. The reason why you need to file a Schedule A with the Internal Revenue Service is because that is where itemized deductions are placed for home purchases. In order to find out how much your mortgage interest is for a tax year you will receive a Form 1098 from your mortgage lender. Form 1098 outlines your total interest paid for that year in addition to showing principle paid and escrow balances. By law your lender is required to provide this information no later than January 31 of the following year. If you are unsure about the various forms contact your local tax and revenue office or use tax preparation software or a tax-preparation professional service.
In addition to deducting mortgage interest from your taxes you can also deduct points which are normally added to the closing costs of purchasing a home. Points, which are sometimes referred to on closing documents as loan origination fees or maximum loan charges are deducted over the length of the mortgage term. Real estate taxes are also deductible and should be included in your list of itemized deductions. Internal Revenue Service Publication 936 can assist in answering any questions or specific
details regarding additional home deductions.
Certain individuals might qualify for additional deductions based on their current situation. If the move is out-of-state or a significant distance, not just the other side of town, then moving expenses may also be deductible. A corporate transfer or relocation based off new employment may make the expenses involved in moving deductible. Travel costs such as gas, tolls, parking fees and possibly lodging may also be deductible if it is directly related to the required relocation. With these types of expenses, similar to running a small business, it is important to save all receipts and canceled checks as well as keeping a mileage log to document expenses. Not only will this make the information provided in the tax return more accurate but it may also be required should you be audited.
Not all costs associated with a home purchase or relocation are considered tax-deductible. Common items which cannot be itemized on a tax return include homeowner association fees, utility payments, title insurance and homeowners insurance premiums. A common mistake many homeowners make is itemizing tax deductions that do not qualify and subsequently raising red flags at IRS leading to an audit. If you are unsure what can be claimed as a deductible expense consult the various publications provided by the IRS or speak with a tax-preparation service.
For the most part, buying a home will affect your tax filing in positive ways. Besides the obvious benefits of having a place to call your own and building equity, home ownership offers many tax incentives which should not be overlooked when filing your annual tax return. Understanding what can and can't be claimed as a tax deduction will not only ensure you get the maximum tax benefit from your home but also help prevent an unnecessary audit in the future. There are many tax resources available for the general public as well as homeowners so take advantage of the free information and speak to a tax-preparation professional when necessary.