A great milestone of your financial life is the purchase of your first home. While less exciting, the tax implications of that achievement are no less critical. After all, home ownership creates several new opportunities for you to save on your federal income taxes. Got your attention?
Mortgage Interest Deduction
That big fat mortgage payment you now have to pay every month has an upside. The interest portion of every payment is tax deductible. Keep in mind that, at the beginning of your mortgage, most of your payment is interest, meaning that the overwhelming majority of your payment is tax deductible.
Real Estate Tax Deduction
Every dollar you pay in real estate taxes is deductible. While it’s never fun to learn that your property taxes have gone up again, at least you will be able to take some solace in knowing your tax deductions (and your resulting income tax savings) will increase at the same rate.
Charitable Donation Deduction
While the charitable donation deduction might seem unrelated to a home purchase, this is income taxes we’re talking about. Before you purchased your home, you may not have had enough tax deductions to itemize your deductions.
Why? Since your standard deduction was greater than your itemized deductions, you did not benefit from any of the itemized deductions you could have otherwise taken. But when you became a homeowner, the mortgage interest and real estate taxes alone often make it so that you will be able to itemize and you are now eligible for additional tax deductions. The most common of these is the charitable donation deduction. So, if you tithe at church or give clothes to the Vietnam Veterans, you will now also receive a tax benefit from doing so.
Other Considerations for First Time Home Buyers
Save your closing form (HUD). When you file your tax return for the first time after buying a home, additional expenses incurred on your HUD may be deductible, including prepaid interest (points) you pay at closing.
Save all of your home improvement receipts. You are likely to sell your home one day. Most home sales do not result in income tax. However, it is possible if you move very quickly or make a very big profit. To lessen the odds you will owe capital gains taxes on the sale of your home, save your receipts!
Welcome to the world of home ownership. It can be wonderful and expensive. Make sure you take advantage of every opportunity to keep your costs in line. Start with taking maximum advantage of the tax deductions available to you.
Don’t worry about knowing all of these tax deductions, TurboTax will ask you simple questions, and give you the tax deductions you’re eligible for. If you have questions, only TurboTax lets you talk to CPAs, Enrolled Agents, and tax attorneys while you prepare your tax return, free.