When you’re buying your first home, you face a lot of interesting days ahead. As you plan for new curtains and updated flooring, don’t forget to plan for your taxes as well. As a first-time homebuyer, there are some specific tax breaks and benefits that are heading your way. Here’s everything you need to know to make sure that you are maximizing those benefits.
One thing many first-time homebuyers don’t know is that they can deduct their mortgage interest. In fact, you can deduct the mortgage interest on up to $1 million of loans on real estate. This tax break is the highest when your mortgage is new because this is when you pay the most interest on the home due to loan amortization.
To claim this deduction, you will need to itemize it on your tax return. You may want to partner with an accountant if you have never itemized before, as the process is a bit more complex than simply taking the standard deduction. Still, if the mortgage interest you paid this year helps you reduce your tax burden, then definitely look into it.
If you have a traditional or Roth IRA, you can take some money, up to $10,000, out of it without the early withdrawal tax penalty if you are a first-time homebuyer and are using the money for home buying expenses, like your down payment or closing cost. You will still have to pay income tax on the withdrawal, but you will not have a 10% penalty. If you are married and your spouse also has an IRA, they can also withdraw $10,000, giving up to $20,000 as a couple for your closing costs and down payment.
If you pay state and local property taxes for your newly purchased home, you can deduct that amount from your taxes. This can be sizable, depending on the amount of tax you pay. If your taxes are paid through your mortgage escrow program, take a look at the 1098 form to see the amount. Otherwise, look it up with your taxing authority. Like the mortgage interest, this deduction is only available if you itemize your taxes.
If you’re planning to make some home improvement in your newly purchased home, consider adding energy-saving improvements to the list, and you might be able to get additional tax credits. The Residential Energy Credit allows homeowners who install energy-saving features, like solar panels or geothermal systems, to receive a tax credit for up to 30% of the system’s total cost. More energy-efficient and even new HVAC systems can qualify for that tax credit. Because this is a credit and not a deduction, you save the full amount of the credit on your taxes, rather than simply reducing your tax obligation.
Do you plan to work from home when you move in? Consider taking the home office deduction. Even if you are working a repair business from your garage or store your equipment in your garage, you may be able to take this deduction. The home office deduction takes a percent of your home’s expenses, including insurance, utilities, repairs, and mortgage interest, and deducts it as a business activity. Your tax professional can help you get the most out of this particular deduction, which can be a little tricky to figure.
If you choose to pay points when you get your mortgage, you can deduct these as well, and this particularity deduction can be quite good when interest rates are low. Mortgage points allow you to prepay some of your interest to lower your mortgage interest rate. The amount you pay in points does qualify for a deduction because it is an interest payment. In fact, this is one of the best tax breaks available to first-time homebuyers at the moment. Not only do you get to lower your tax burden, but you also get to lower your interest rate, so the savings keep going.
The options available to first-time homebuyers to use their home purchase to lower their tax bill can feel overwhelming. To make the most out of these deductions, work with a qualified real estate agent during the home buying process and a qualified accountant when you file your taxes. By partnering with these professionals, you can move forward with the right information to make informed decisions and maximize your tax deduction.