Besides providing you with a stable place to live and raise a family and a safe long-term investment, being a homeowner also allows you to take advantage of several tax deductions and credits that are not available to anyone else. Following are the top ways homeownership can help lower your income taxes.
Mortgage Interest Deductions
IRS Form Schedule A can be submitted with a Form 1040 to deduct the amount of interest you pay on a mortgage secured by your home. If you are single or filing separately from your spouse, the maximum amount of the mortgage is $500,000 while couples filing together may have a mortgage of up to $1 million. Second mortgages for improvements or a second home also qualify as long as the total of both mortgages are under the limit.
Deductions for Pay Points
Taking pay points is synonymous with prepaying your interest, so the money you spent on points for a new mortgage can be deducted during the year they were purchased. This deduction can also be made for points taken when refinancing.
Property Tax Deductions
The federal government recognizes property taxes by allowing you to deduct the amount paid from your gross income, which is generally shown on your end-of-year escrow statement.
Mortgage Insurance Deductions
If you have private mortgage insurance (PMI) or mortgage insurance from the Federal Housing Authority (FHA), you may claim this expense as a deduction.
Energy Efficiency Credits
Both federal and state governments offer tax credits for making energy-efficient home improvements or buying energy-efficient home appliances. These credits often expire and become available again the next year or a few years thereafter, so you must verify when they can be applied.