Are You Taking Advantage Of Tax Benefits?

When you decide to buy or sell a house, you should consider various tax benefits that are put in place by government to encourage purchasing of homes, this can potentially help you save a great amount of money. As one of your biggest investment, there are some conditions and stipulations that you need to be aware of. It is also a necessity to consult with a financial advisor to better understand the most advantageous benefit you will potentially get.

New provision on home mortgage interest deduction

For 2018-2025, the TCJA generally allows you to deduct interest on up to $750,000 of mortgage debt incurred to buy or improve a first or second residence. For those who use married filing separate status, the home acquisition debt limit is $375,000. That will be the case if your itemized deductions exceed standard deduction. Standard deduction for individuals or married couples filing separately is $12000, for head of household and married couples filing jointly, standard deductions are $18000 and $24000 respectively.

Mortgage interest

Mortgage interest deduction has been the most prominent benefit you can get by far. The interest paid on a mortgage secured by primary or second residence can often be deducted if you could itemize deductions on Federal Income Tax Return. You can also claim a deduction for interest paid on mortgage for building or improving your home. However, there is a limit on the amount of mortgage debt of $750000 which can be tax deductible, interest paid beyond this value does not meet the qualification.

Discount points

Discount points are a form of pre-paid interest used to reduce monthly payment of your loan. Every point on the loan is 1 percent of your total loan cost. Based on your total payment, you are able to pay up to 4 points (4 percent of your total loan). The amount you can save by paying points may vary by lenders, basically you can lower interest rate by 1/8 percent or 1/4 percent for every point you paid. This is a smart way for you to cut your monthly payments for the whole life of loan.

Before entering this deal, you have to think about if you want to own your house for long time. You would better evaluate your potential savings carefully. Though you can save money every month, you have to pay relatively larger amount of money up front. You should stay long enough to recover your initial investment, otherwise you may end up losing money.

Most time, discount points can be deducted if you are the primary borrower and your deduction is itemized, you should also control your points within a particular range. For more details in deduction requirements and other information about closing fees, you have to conduct with a financial advisor to discuss your situation.

Home improvement and repair

In general, home improvement and repair can’t help with tax deduction. However, home improvement can help you save more tax when you sell your house in the future. Any practice that make your house last longer, add value to your house or improve your house for more uses can help your house become more tax valuable. For example, add a swimming pool, a new air conditioning system or even a new roof can yield tax credit in the future.

The cost of repair, on the other hand, cannot accumulate tax credit. Examples for home repair are painting a room, fixing a window, etc.

Tax deduction in reality

Unfortunately, only about 54% borrowers who pay interest are able to receive tax benefits, and many of them receive far less than they expected. Why this happens? There are 2 primary reasons.

Firstly, not every homeowner is qualified for the deduction. You have to itemize your deduction when determining your income tax liability. If you don’t have deductions that add up to more than the standard deduction which is based on your filing status, you are not getting to itemize your deduction and you will end up with no benefits.

Secondly, the amount of deduction is a mere fraction of the amount of the interest paid on mortgage. You don’t get a $1 tax break for every dollar spent, the mortgage interest deduction reduces the amount of income subject to tax owed based on the taxpayer's tax bracket. 

If deductions have been the biggest incentive for you to buy a home, examine the eligibility before making any choices.