There are other, one-time deductions, such as the points you pay at closing, but interest and property taxes are the long-term biggies. These deductions are great news for homeowners. When paying the mortgage bill every month starts to seem like more than you can bear, remember that, come April, you’ll be happily filling out Schedule A, which is a part of your federal income-tax return. If you itemize deductions, the interest and taxes paid on your loan lowers your tax liability.
Deductions, Deductions
Tax deductions can be itemized and subtracted from your adjusted gross income (commonly known as AGI), if they’re greater than the standard deduction allowed by Uncle Sam. The deductions and personal exemptions are subtracted from your income before you figure out how much tax you have to pay on it. If your total income is $45,200, but you have $7,500 in deductions and two exemptions totaling $6,200, you’ll pay tax on only $31,500. When you become a homeowner, you get the privilege of taking some pretty hefty deductions. If you haven’t itemized your deductions before buying the house, make sure you find out all the deductions you’re entitled to before you pay this year’s taxes. Mortgage interest and property taxes are both expensive, and they can take quite a large chunk out of your income when you total them up for tax purposes. That’s good news for your wallet on April 15. Interest and taxes are the biggest mortgage-related deductions, but there are others. You also can deduct the points you pay at settlement, but you can only get this deduction in the year that you first get the mortgage. Points usually are the responsibility of the buyer, but a seller that really wants to sell can sometimes be convinced to assume responsibility for paying some, or all, of the cost of the points. If you can convince the seller to pay the points, you win in two ways. One, you don’t have to pay the points. Two, you can still deduct them from your income tax. If you and the seller split the points, you still get to deduct the total amount. Be aware that if you buy a home late in the year, you won’t see too much tax advantage the first year. People often buy homes in September or October and are convinced they’ll get great tax breaks when it comes time to file. But remember that the standard deduction for a married couple filing jointly is $9,700. You can’t itemize things such as your mortgage interest and property taxes until your deductions add up to more than the standard deduction. So if you buy your home in October, you might not have enough time to build up deductions that will total more than $9,700. If you don’t take the deduction for points the same year you buy the house, you can amortize, which means you gradually take the points over the period of the loan. So if you have a 20-year mortgage and your itemized deductions didn’t reach more than $9,700 (if you are married), you can take a deduction for some of the points you pay up front on your mortgage each year for the number of years that you have the mortgage. For example, if you have a 15 year, $100,000 mortgage with 3 points, 1/15 of the $3000 in points is taken as a deduction each year. In addition to deducting mortgage interest and points, you can deduct some of the property taxes and other expenses that are finalized at settlement. Some of the expenses you pay at settlement can be deducted from your income tax, and some of the other expenses are considered capital expenses when you sell your home. Capital expenses are expenses used toward the “basis” of your property, which are considered part of the cost.
