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, homeownership creates several new opportunities for you to save on your taxes.
Mortgage Interest Deduction
That big 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 may be tax deductible.
Real Estate Tax Deduction
The money you pay for real estate taxes is tax 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 will increase at the same time.
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 and you may have had to claim the standard deduction instead ($12,400 single, $24,800 married filing jointly in 2020, $12,550 single, $25,100 married filing jointly in 2021).
Why? Since you didn’t have itemized deductions like home mortgage interest and property taxes prior to buying your home your standard deduction may have been greater than your itemized deductions, so you could not benefit from any other itemized deductions like charitable contributions. However, when you become a homeowner, the mortgage interest and real estate taxes alone often make it so that you will be able to itemize which means you are now eligible for additional tax deductions.
Don’t forget that in order to claim a tax deduction for charitable donations, you have to donate to a not-for-profit 501(c)(3) charitable organization and typically you have to have enough tax deductions to itemize your deductions. Under the CARES Act there is the addition of a new charitable deduction up to $300 on your 2020 taxes for your cash donations made to a 501(c)(3) organization even if you don’t itemize your deductions. Under the Coronavirus Response and Relief Supplemental Appropriations Act passed in December, you can deduct up to $300 in cash donations for tax year 2021 (the taxes you file in 2022) if you claim the standard deduction and you are single, and up to $600 in cash donations if you are married filing a joint return. TurboTax ItsDeductible will help you accurately value and track your charitable contributions year-round and then transfer your contributions to your 2021 tax return.
Other Considerations for First Time Home Buyers
Save your closing statement (HUD). When you file your tax return for the first time after buying a home, additional expenses incurred on your HUD may be tax 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. Although the sale of your principal residence where you live may not result in income tax, 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 for home improvements made, as they can increase your cost lowering your gain when you sell.
Don’t worry about knowing all of these tax deductions, TurboTax will ask you simple questions and give you the tax deductions and credits you’re eligible for based on your answers. If you have questions, you can connect live via one-way video to a TurboTax Live tax expert with an average of 12 years experience to get your tax questions answered from the comfort of your home. TurboTax Live tax experts are available in English and Spanish year round and can also review, sign, and file your tax return or you can fully hand your taxes over to them. All from the comfort of your home.