How Homeowners Can Get The Maximum Tax Refund?
Owning a home. Ask any landlord what is so good about owning versus renting, and most will say “tax deductions!” That’s correct because all homeowners who list their taxes can deduct 100% of their mortgage interest and property taxes from their tax returns. But how do you get the maximum tax refund for homeowners?
If you don’t already own a home, there may be good reasons, but the advantages of owning a home far outweigh the rent. There are really only two reasons not to own a home: You can live rent-free with your parents or friends, or maybe you plan 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 homeownership is that it allows you to deduct the interest you pay on your mortgage. This is usually the highest tax exemption for most people because a significant amount of their home payment goes toward interest during the first few years of a mortgage. The main advantages of owning a home when tax season comes?
A deductible mortgage interest that includes “points” when you buy your home.
Deductible property taxes on your return.
Deductions for improvements made to your home when you sell.
Up to $500,000 in tax-free capital gain earnings when you sell your home.
To get the maximum tax refund for homeowners, you’ll need to use Form 1040 and itemize your deductions. If you are in a 28% tax bracket, the government effectively subsidizes about a third of your loan 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 make when you sell your home are exempt from income taxes.
At the time of taxes, it is essential to know what you are entitled to, in order to claim it. So here are five essential tax tips to get the maximum tax refund for homeowners.
Essential Tax Tips To Get The Maximum Tax Refund For Homeowners
1. Complete the long-format least once and learn how to itemize your deductions
Nearly 40% of homeowners lose their number one tax advantage each year when they don’t itemize their income taxes. If you own a home and otherwise have a fairly simple return, it might be tempting to just take the standard deduction or file Form 1040A. In some cases where your 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 complete both forms at least once.
So before you start filling out Form 1040A or 1040EZ, gather your documents and answer questions about tax software like TurboTax, which will automatically do the math on whether itemizing or taking the standard deduction will result in the lowest tax bill.
Why do the extra work? You can only pay less tax, never again by completing the longer Form 1040.
2. Deduction from a home office
The average home office deduction is over $3,000. Of course, there are special IRS rules 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 the IRS.gov website for complete details.
3. Tax relief for loan modifications, foreclosures, and short sales
The Making Home Affordable ® (MHA) ® Program is an important part of the Obama Administration’s comprehensive plan to stabilize the United States real estate market by helping homeowners obtain mortgage relief and avoid foreclosure. To meet the diverse needs of homeowners across the country, Making Home Affordable ® programs offer a range of solutions that can help you take action before it is too late. You may be able to refinance and take advantage of current low mortgage interest rates and lower your monthly mortgage payments.
While long-term housing prospects began to improve in 2011, loan modifications are expected to peak this year. Distressed homeowners who are on the brink of a short sale, loan modification, or foreclosure should be aware that, normally, any mortgage balance that is removed by one of these results is taxed as what the IRS calls Debt Income Cancellation, or CODI.
Under the Mortgage Debt Relief Act of 2007, the IRS does not currently charge income taxes on CODI incurred through a loan modification, short sale, or foreclosure on most residences through 2012. But the Banks are taking many months, or even years, to settle 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 MakingHomeAffordable.Gov. or call 888-995-HOPE (4673) to speak to an expert.
4. The tax consequences of refinancing or appeal of property taxes
Homeowners around the world are working to request a lower property tax bill based on the decline in recent years in the value of their homes. Those with equity have attempted to refinance their existing mortgage loans at rates of 4% to 5% in recent years. These strategies offer some of the biggest savings today. But here is a little caveat for homeowners who can cut these costs. Property taxes and mortgage interest, the same costs you are minimizing, are also the basis of the main tax benefits of owning a home. Therefore, plan ahead for your tax deductions to decrease along with your taxes and interest.
5. Don’t forget the closing costs
If you bought or refinanced your home, you may focus on your mortgage interest and property tax deductions that will completely forget about your closing costs. Remember that any opening fees or discount points that were paid to your mortgage lender at closing are tax-deductible on your return. When you finance a house, you can pay what is called “points.” The points lower the interest rate on your mortgage by effectively prepaying a portion of the interest at closing.
Points are paid by the borrower to the lender as part of the loan agreement and are a percentage of the loan. Points can also be called loan origination fees, maximum loan charges, loan discounts, or discount points. If you can’t determine exactly what you paid for, look up your HUD-1 statement. It is full of credits and debits for line items that you should have received from your custody provider or title attorney at closing.
Useful tip: There are two things you can count on when you become an owner: You get more tax breaks, and your taxes get more complicated. Whether you’ve purchased a single-family home, a townhome, or a condo, tax breaks are available to you. It’s time to get familiar with the tax forms because there 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 premiums on certain mortgages. If you make a down payment of less than 20%, you are generally required to have private mortgage insurance. The buyer pays for this type of insurance but protects the lender in case the borrower defaults on the loan. PMI premiums can be deducted if the mortgage was issued after 2006. This deduction may change in 2012, so check the IRS website for updated information.
There are also huge tax savings on profit when you sell. If you are going to live in your home for at least 5 years, consider buying a home for this reason alone. When you sell your home, the amount of your profit from the sale is tax-free if you meet the criteria. If you’re married, you can make a profit of up to $ 500,000 on the sale, and you won’t have to pay income tax. If you are single, you can earn up to $ 250,000 without paying any federal taxes. There is only one downside: You must own and occupy your home for at least two of the past five years. Visit IRS.gov for more information.