Tax Deductions for Home Buyers in 2016
Did you buy a home last year? You may be just settling into your new home and unpacking that last box, but there is more work to be done – learning which expenses you can claim as tax deductions as a new homeowner. This is an area where it pays to buy a home rather than rent! This is probably a year where having a tax advisor or accountant to help you file is a wise investment because they can ensure you get the most out of these new deductions that you are entitled to. But, it pays to understand the basics before you head to see your tax professional. The following is a list of terms regarding homebuyer deductions, and what they mean.
Homeowners can take advantage of a mortgage interest deduction, which is claimed on the Schedule A. To get the mortgage interest deduction, your mortgage must be secured by your home. Interest you pay on a mortgage of up to $1 million, or $500,000 if you’re married and filing separately, is deductible when you use a loan to buy, build, or make improvements to that specific home.
Mortgage companies will send out a Form 1098 in the mail, which is used to document the prepaid interest (or points) that you paid for your loan. If you did not receive this form, you can locate the dollar amount you paid on the closing disclosure, which you received when you closed on the purchase of your home. Points, which are paid at the time the mortgage is taken out, are typically 100% deductible in the year you paid them. Home mortgage interest and points are reported on Schedule A of IRS Form 1040.
Real Estate Property Tax
Homeowners can claim their real estate property taxes for 2016 as a deduction, listed on the Schedule A. Your mortgage lender should send you a tax statement that shows the amount of real estate property taxes you paid through the escrow account that they manage for you, which is funded through a portion of your monthly mortgage payments. The year-end statement should show the grand total for property taxes paid.
Private Mortgage Insurance (PMI) Premiums
Did you put less than 20 percent down on your home? Speak to your tax professional to determine if a PMI deduction applies to you. This deduction is typically only if you itemize your return, and there are some exceptions to qualifying. Essentially, it allows homebuyers to deduct the cost of PMI as mortgage interest on Schedule A. In other words, you can treat the amounts you paid during 2016 for qualified mortgage insurance as home mortgage interest when you file. The insurance must be in connection with home acquisition debt, and the insurance contract must have been issued after 2006.
Energy Efficiency Improvements
If you invested in renovations or improvements that made your home more energy efficient in 2016, you might qualify for the residential energy tax credit. The credit is filed on IRS form 5695 with your tax return. This deduction has a lifetime cap of $500 (less for some products), so if it is a deduction you have utilized previously, you’ll have to subtract prior tax credits from that $500 limit. Some of the energy improvements that may qualify include:
Buying a home is an investment, but it can offer many benefits to your life as well as your financial health. Make sure you reap the benefits of all the tax deductions you qualify for, and ask your tax professional about any questions you may have.
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