How do Taxes Change for First-Time Homeowners?
You’ve turned the key in the door and taken the first look around your new home as a full-fledged homeowner. Congrats! One foot inside and you’re likely already in paint sample heaven. The last thing you want to think about is a first-time homebuyer tax credit, right? Well, there’s good news and there’s bad news: Your new home comes with some great tax perks, but you need to start planning now for next year’s filing. Here’s a sampling of the tax benefits of buying a home and tax breaks you can take advantage of.
Be aware of these new deductions and credits
Buying your first home is a life event that comes with a whole lot of tax deduction possibilities. These are tried-and-true deductions that add up to serious savings. When you are filing taxes a home owner you can deduct the following:- Mortgage interest. Yes, the interest on your monthly payment is deductible. In 2017 and prior, you could deduct interest on mortgage debt up to $1 million, but as of 2018 filings, that figure has been reduced to $750,000.
- Mortgage points. If you brought your mortgage interest rate down by a point or two, you can deduct that cost from your first tax filing after your purchase.
- Property taxes. You can deduct your full real estate taxes on your annual taxes.
- Mortgage insurance payments. If your down payment was less than 20%, you’re probably paying mortgage insurance every month. Nobody likes paying it, but at least it’s deductible!
- Home office space. If you work from home, you can deduct the square footage where you conduct business on your taxes.
- Credit for certain home repairs. If you upgrade your home to become more energy efficient, you may be able to deduct some of the costs so hang onto those receipts.
- Waived IRA fees. While it’s not exactly a credit, if you dip into your IRA to make a home down payment, the IRS will waive the 10% penalty for removing money early. You can take up to $10,000.
- Various itemization benefits. Before you bought a home, you may have taken the standard deduction. With enough reason to itemize, you’re eligible for all sorts of deductions, such as charitable donations.
Avoid surprises by planning now
Do yourself a favor by planning your taxes ahead. If you’re not aware of which documents you’ll need, it’s better to consult a CPA as soon as you can. Here are a few tips on preparing early:- Make a checklist of mortgage-related payments. Make a list and check it twice – your mortgage lender will send you necessary tax documents, but know what you’re looking for in the mail and hang onto them.
- Keep receipts for home improvements or donations. When in doubt, save all receipts related to everything from charitable donations to home office purchases that could be deducted.
- File early in case your accountant needs more information from you.
