You may have missed out on some of the tax benefits of owning a home this year, but you don't have to next year. Maybe you were in a hurry to file your taxes and didn't maximize your deductions. Now that you have time to think about next year, you can put together a strategy to ensure you get the most out of your homeowner tax benefits in 2016.
What is the Homeowner Tax Deduction?
A homeowner tax deduction helps to reduce your taxable income. In short, this means you pay less tax on your overall income. If you own the residences you primarily live in, the IRS will allow you to deduct both property taxes and mortgage interest. This is found on Schedule A of your taxes and carried over to Form 1040.
What can a Homeowner Deduct?
The most common two deductions for a homeowner include: mortgage interest and property taxes. Both must be the amount you paid during the calendar year you are filing for and you can only deduct the amount paid to your county assessor for that year, even if your lender collected more.
If the home was bought in the year you are filing for, you can also deduct any pro-rated property taxes paid at closing. Make sure to keep your closing statement for taxes. You will also be able to deduct any "origination" fees or "discount" fees paid on your final closing statement.
How do these Deductions Benefit You?
It may be easier to understand the importance of getting all the homeowner tax deductions after looking at a simple example. If you buy a home for $300,000, you make $90,000 a year, you put 20% down and you get a mortgage with a term of 30 years at 3.75%, you'd have a payment on your home of $1,478.
This payment includes $300 for property taxes and $67 for insurance. You would pay about $9,000 in a full year in mortgage interest and about $3,600 for property taxes. This would give you deductions of $12,600 for your home.
Estimating this at a 28% tax rate, you would save about $3,528 on your taxes due to this deduction. This means, you would be saving about $294 per month from the deduction allowed on your taxes.
Homeowners get tax benefits, but if you don't take advantage of them, you may be paying too much in taxes. Make sure you have a strategy for next year.