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How can homeowners get the maximum tax refund?
Owning a home. Ask any homeowner what’s so great about owning versus renting, and most will say “Tax Cuts!” This is true because all homeowners who itemize their taxes are able to deduct 100% of their mortgage interest and property taxes from their income tax returns. But how do you get the maximum tax refund for homeowners? If you don’t own a home yet, there may be good reasons, but the benefits of owning a home far outweigh renting. There are only two reasons not to own a home – you may be living rent free with your parents or friends or you may be planning to move in 3 years or less. Even if you are single, but plan to stay in the area for more than 3 years, consider buying a home.
The main tax incentive for owning a home is that it allows you to deduct the interest you pay on your mortgage. This is usually the biggest tax cut for most people, because a large amount of your home payment goes toward interest during the early years of the mortgage. The main advantages of being a homeowner when tax season comes around?
Deductible mortgage interest including “points” when you purchase your home.
Property taxes withheld on your return.
Deductions for improvements made to your home when you sell.
Up to $500,000 in tax-free capital gains when you sell your home.
To get the maximum tax refund for homeowners, you’ll have to use Form 1040 and itemize your deductions. If you’re in the 28% tax bracket, the government effectively subsidizes about a third of your borrowing costs, making your home more affordable. Also, your closing costs and points are tax-deductible, and hundreds of thousands of dollars of any capital gains you realize when you sell your home are tax-free.
At tax time, it’s crucial to know what you’re entitled to, so you can claim it. So here are five essential tax tips for getting the most out of your tax refund for homeowners.
1. Fill out the long form at least once and learn how to itemize your deductions.
Approximately 40% of homeowners lose their first tax benefits each year when they fail to itemize their income taxes. If you own a home and have a fairly modest return, it may be tempting to take the standard deduction or file Form 1040A. In some cases where the mortgage, property taxes, and income are low enough, the standard deduction may be a larger deduction than your itemized deductions. But you will never know unless you fill out both forms at least once.
So before you start filling out Form 1040A or 1040EZ, get your papers together and answer questions about tax software like TurboTax, which will automatically calculate whether selecting or taking the standard deduction will result in the lowest tax bill.
Why work overtime? You can only pay less taxes, not more, by filling out the longer 1040 form.
2. The home office discount.
The average home office deduction is over $3,000. Of course there are special rules for the IRS on what you can claim as a home office. The space you claim as your home office cannot be exempt from capital gains tax when you sell your home. Visit IRS.gov for full details.
3. Tax exemption for loan modifications, foreclosures, and short sales.
The Make Home Affordable ® (MHA) Program is an important part of the Obama administration’s comprehensive plan to stabilize the US housing market by helping homeowners obtain mortgage relief and avoid foreclosure. To meet the various needs of homeowners across the country, Make Home Affordable ® programs offer a range of solutions that may be able to help you take action before it’s too late. You may be able to refinance and take advantage of today’s lower mortgage interest rates and lower monthly mortgage payments.
While long-term housing prospects began to improve in 2011, loan modifications are expected to peak this year. Defaulted homeowners who are about to sell short, modify a loan, or foreclosure should be aware that typically, any mortgage balance that is wiped out by one of these results is taxed as the IRS calls Debt Income Cancellation, or CODI.
Under the Mortgage Relief Act of 2007, the IRS currently does not charge income taxes on CODI incurred through a loan modification, short sale, or foreclosure on most residences through 2012. But banks take several months or even years to work out new mortgages . If you see any of this happening in your future, don’t put things off. Get free advice from a housing expert at Make home affordable. Or call 888-995-HOPE (4673) to speak with an expert.
4. The tax consequences of a refinance or property tax appeal.
Homeowners everywhere are working to file for a lower property tax bill based on the depreciation in the value of their homes in the past few years. Those with equity have tried to refinance their existing mortgages to rates of 4% to 5% for the past few years. These strategies offer some of the biggest savings today. But here’s a little warning for homeowners who can afford to keep those costs down. Property taxes and mortgage interest, which are the costs you minimize, are also the basis for the major tax benefits of being a homeowner. So plan ahead to lower tax deductions along with taxes and interest.
5. Don’t forget about closing costs.
If you buy or refinance your home, you might be so focused on mortgage interest and property tax deductions that you forget all about closing costs. Remember, any origination fees or deduction points paid to your mortgage lender at closing are tax deductible on your return. When you finance a home, you pay what are called “points.” Points lower your mortgage interest rate by prepaying a portion of the interest at closing. Points are paid by the borrower to the lender as part of the loan transaction, and are a percentage of the loan. Points may also be called loan origination fee, maximum loan fee, loan origination fee or rebate points. If you can’t find out exactly what you paid, find your HUD-1 Settlement Statement. It is full of credits and deductions that you must obtain from your escrow provider or title attorney at closing.
Helper iconThere are two things you can count on when you become a homeowner: you get more tax breaks, and your taxes get more complicated. Whether you purchased a single-family home, townhouse, or condominium, tax credits are available to you. It’s time to familiarize yourself with the tax forms because this is where you will have to provide all the details about your new tax-deductible expenses.
Don’t forget the PMI premiums on your tax return. PMI is the private mortgage insurance premium on certain mortgages. If you make a down payment of less than 20%, you are generally required to carry private mortgage insurance. This type of insurance is paid by the buyer but protects the lender in the event that the borrower stops paying the loan. PMI premiums can be deducted if the mortgage was issued after 2006. This deduction may have changed in 2012, so check the IRS website for current information.
Final thought: There is also a huge tax savings on the gain when you sell. If you are going to live in your home for at least 5 years, you are considering buying a home for this reason only. When you sell your home, the amount of your gain from the sale is tax deductible if you meet the criteria. If you’re married, you could get up to $500,000 on the sale, and you don’t have to pay tax on the profits. If you are single, you can earn up to $250,000 without paying any federal tax. There’s just one catch: You have to own and occupy your home for at least two out of the past five years. visiting IRS.gov for more information.
