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Maximizing Your Tax Deductions And Tax Breaks As A U.S. Homeowner

Posted January 11, 2015

Maximizing Your Tax Deductions And Tax Breaks As A U.S. Homeowner

Tax benefits of homeownership : For what tax deductions are homeowners eligible?

U.S. Tax Code Offers Breaks To Homeowners

This article is current for the 2014 tax year and should not be considered tax advice. For tax-related questions or mortgage strategy related to your individual tax liability, speak with a licensed accountant.

It's January 2015 and, for Americans, the 2014 tax year has concluded.

Within weeks, U.S. consumers will begin receiving such tax-related forms as the W-2, the 1099, and, for homeowners, the 1098, which is also known as the Mortgage Interest Statement.

The U.S. tax code offers incentives to homeowners, and by taking advantage of these breaks, 1040-filing citizens can maximize their financial investment in homeownership.

Whether a home is financed via a mortgage, or paid-in-full with cash, there are a multitude of tax-savings opportunities associated with owning a home -- even at current mortgage rates which are the lowest since May 2013.

Of course, every homeowner's financial situation is different, so please consult with a tax professional regarding your individual tax liability.

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Tax Deduction #1: Mortgage Interest Paid

Mortgage interest paid to a lender is tax-deductible and, for some homeowners, interest paid ca provide a large tax break -- especially in the early years of a home loan. This is because the standard mortgage amortization schedule is front-loaded with mortgage interest.

At today's mortgage rates, annual interest payments on a 30-year loan term exceed annual principal payments until loan's 10th year.

Mortgage interest tax deductions are extended to second mortgages, too.

Interest paid on a refinance loan, home equity loans (HELOAN) and home equity lines of credit (HELOC) are tax-deductible as well. However, restrictions apply on homeowners who raise their mortgage debt beyond their property's fair market value.

The Internal Revenue Service (IRS) imposes a $1 million loan size cap. Loans for more than one million dollars are exempt from this tax deduction.

This is one reason why homeowners with jumbo mortgages limit themselves to one million dollars per loan. Loans for more than $1,000,000 sacrifice mortgage interest tax deduction. 

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Tax Deduction #2: Discount Points

Mortgage tax deductions can extend beyond your monthly payment. Discount points paid in connection with a home purchase or a refinance are typically tax-deductible, too.

A discount point is a one-time, at-closing fee which gets a borrower access to mortgage rates below current "market rates". One discount point costs one percent of the borrower's loan size.

As an example, if the current market mortgage rate is 3.5%, paying one discount point on loan may get you access to a mortgage rate of 3.00%. For a loan in Orange County, California, at the local 2015 conforming loan limit of $625,500, this one discount point costs $6,250.

In Miami, Florida, one discount point at the local loan limit of $417,000 would cost $4,170.

According to the IRS, discount points are considered "prepaid mortgage interest" because it's an advance payment on a mortgage in exchange for lower interest payments over time. This classification, in turn, can render discount points tax-deductible.

The tax-deductibility of discount points varies by loan type.

When discount points are paid in conjunction with a purchase, the cost may be deducted in full in the year in which they were paid, dollar-for-dollar. With respect to a refinance, discount points are not fully tax-deductible in the year in which they are paid.

With a refinance, discount points are typically amortized over the life of the loan.

The cost of one discount point on a 30-year loan can be deducted at 1/30 of its value per tax-calendar year.

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Other Deductions : Property Taxes, Renovations, Home Office

Real Estate Taxes

Homeowners typically pay real estate taxes to local and state entities. These property taxes can often be deducted in the year in which they are paid. If your mortgage lender currently escrows your taxes and insurance, it will send an annual statement to you which you can file with your complete federal tax returns. Your accountant can help determine the payment's tax deductibility.

Home Improvements

For tax-paying homeowners, certain types of home improvement projects are tax-deductible. Home improvements made for medical reasons, for example, can be tax-deductible. If you are making home renovations to accommodate a chronically ill or disabled person, and the renovations do not add to the overall value of the home, the project costs are typically 100% tax deductible. Repairs and improvements made for aesthetic purposes are not tax-deductible.

Home Offices

Homeowners who work from their residence can typically deduct the expenses of maintaining a qualified home office. Allowable tax deductions for a home office include renovations to the room(s), telephone lines, and the cost of heat and electric. Before claiming a home office on your returns, though, be sure to speak with an accountant to understand the benefits and liabilities. There are caveats to claiming home office tax deductions on your tax returns, and the rules can be tricky.

Budget For Your Tax Breaks

Tax deductions will reduce your annual costs of homeownership and, for some homeowners, mortgage interest tax deductions affect the math of the "Should I Rent or Should I Buy?" question.

Tax law changes frequently, though. Consider building your housing budget with the help of a tax preparer. Get a feel for how much home you can afford before and after accounting for your various homeowner tax breaks.

And, as you build your budget, use legitimate mortgage rates in your calculations. Historical mortgage rates are much higher than today's low rates and can skew your calculations.

Furthermore, the tax deductibility of a mortgage will vary by the length of your loan. 

15-year fixed-rate mortgages have become increasingly popular as interest rates have dropped, but the deductibility of a 15-year loan is decidedly less than that of a 30-year loan. This is because homeowners pay approximately 65% less mortgage interest over time with a 15-year mortgage as compared to a 30-year.

Less interest paid means fewer mortgage interest tax deductions. 

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The 2014 tax year has concluded. First-time homeowners can maximize their 2015 tax deductions by buying early in the year; and existing and repeat homeowners can maximize theirs by planning ahead.

Compare current mortgage rates to see what's available today. Rates are available online at no cost, with no obligation to proceed, and with no social security number required to get started.

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The information contained on The Mortgage Reports website is for informational purposes only and is not an advertisement for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent, or affiliates.

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2015 Conforming & FHA Loan Limits

Mortgage loan limits for every U.S. county,
as published by Fannie Mae & Freddie Mac, and the FHA.