78. Save $1,000s per year – 40 ways homeowners save on taxes
This article includes a comprehensive listing to save taxes for homeowners.
Those who own a house qualify for write-offs and credits that other tax payers do not. By understanding which write-offs, credits and deductions you can claim, you can avoid overpaying for taxes.
If you are unsure whether or not you fit the criteria for a write-off you should consult a tax professional.
1. First-Time Buyer Credit: If you purchased your first home in 2009 or 2010 you are not required to pay back the first-time buyer credit you received on your tax return. As long as the house that was purchased remained the primary household, or there were mitigating circumstances covered by the detailed waiver qualifiers, you do not need to make the structured repayment.
2. First-Timers Withdrawing From IRA: Usually, those under the age of 59.5 years would need to pay a 10% tax penalty to withdraw funds from an IRA. Congress has waived that penalty for first-time home buyers withdrawing up to $10,000 from an IRA, saving big money for those who qualify.
3. House Improvements: While you cannot take write-offs or deductions for improvements made to your house, careful record keeping can trigger write-offs in the future. All improvements that increase the value of your home can be added to the overall price you paid for your home, limiting any possible profits you make from selling it later.
4. Real Estate Taxes: The amount of local real estate tax that was paid from your escrow account can be used as a write-off on your taxes. For example, when you moved into your home the previous owner had already made payment for that year’s tax. You would have repaid the seller for the time you lived in the home while their payments were covering property taxes. This amount can be taken as a deduction, as you do not need to pay those taxes twice.
Deduct your state, local, and foreign income taxes, and non-business property taxes. Experts say taxpayers often forget that these are deductible.
5. Mortgage Interest: If you own a house and pay interest on your mortgage, a portion of that interest can be used as a tax write-off. On Form 1098 you will see the amount you paid the previous year in mortgage interest. That amount is then deducted on Schedule A. This deduction does cover the time between first-time house buyers closing on a home through the end of that calendar month.
If you own a house, especially as a first-time buyer, there are several write-offs, deductions and credits you need to be aware of. Careful inspection of the statements you receive and an understanding of what you qualify for will save you from over-paying on your taxes.
7. Include investment advice: If you paid for financial advice, claim it as an investment expense.
8. Deduct necessary home improvements: Deduct home renovations that are medically necessary, like a wheelchair ramp.
9. Rental property - Huge tax write-offs for income property: If you have rental property, deduct any and all expenses related to managing and maintaining it, including mileage involved in checking on the property, collecting rent, or running around getting the supplies to make a repair, the cost of which is also deductible.
As a rental property owner, you are entitled to huge tax deductions. You can write-off interest on your mortgage or on any credit cards used to make purchases for the property. You can write-off your insurance, maintenance repairs, travel expenses, any legal and professional fees, and even your property taxes.
On top of all of these deductions, the government also allows you to depreciate the purchase price of your property based on a set depreciation schedule, even if your property is actually appreciating in value.
Using our above example, you receive $3,480 in rental income for the year ($290 each month * 12 months). If you made this money at a regular job or in the stock market, you would lose a significant portion of it to pay income taxes. However, by owning a rental property, you can offset the $3,480 income with the depreciation expense for your property, thus being able to reduce or completely eliminate the amount of taxes you have to pay on this rental income.
Speak to an accountant to determine all of your specific tax write-offs.
10. File amended returns: If you missed these deductions or any others (see below), you may file amended tax returns going three years back.
11. Boats as homes: A boat that has eating, sleeping and sanitary facilities can qualify as a first or second home, so you can deduct mortgage interest paid on the loan secured by the boat to buy it. However, if you are subject to the alternative minimum tax, this write-off is not allowed.
12. Canceled debt on foreclosure or short sale: Generally, when a debt is canceled or forgiven, the borrower is considered to have received taxable income equal to the amount of the canceled debt. However, through 2012, up to $2 million of debt discharged on a mortgage on a principal residence -- in a foreclosure, for example, or short sale -- can be tax-free.
13. Casualty loss: If your home was damaged or destroyed -- by fire or storm, for example -- you may be able to get financial help from Uncle Sam by deducting a casualty loss on your return. Your deduction for a 2010 loss is generally the total of your unreimbursed loss reduced by $500 and further reduced by 10% of your adjusted gross income.
14. Depreciation on home: Profit due to depreciation claimed on your residence before May 7, 1997 -- because you had a home office, for example, or at one time rented out the property -- qualifies for the rule that lets you treat $250,000 of home sale profit as tax-free income. (The limit is $500,000 if you're married and file a joint return.) Profit due to depreciation after May 6, 1997, is taxed at 25%, unless you're in a lower tax bracket, in which case that rate applies.
15. D.C. first-time homebuyer credit: If you bought a home in the nation's capital during 2010, you may be eligible for a $5,000 tax credit. It doesn't really have to be your first home ... just a home you purchased in the District of Columbia after not owning one in D.C. for at least one year. It doesn't matter if you have owned a home elsewhere. This break phases out as income exceeds $70,000 on single returns and $110,000 on married filing jointly returns. See first-time homebuyer credit. If you bought during the part of 2010 when the nationwide homebuyer credit was available (see below), you must choose between the two credits. You can’t claim both.
16. Energy credits: You can earn a 2009 tax credit for installing energy-saving home improvements such as new doors, new windows, energy-efficient furnaces, heat pumps, hot water heaters, air conditioners, etc. The credit is 30% of the cost of installing such energy savers, up to a top credit of $1,500. For windows and doors, the credit is based on the cost of the materials; for furnaces and air conditioners and the like, you can count the cost of installation, too. A bigger credit is available for more ambitious projects – like solar hot-water heating systems, geothermal heat pumps and, yes, even residential wind energy systems. Start generating your own power and Uncle Sam will rebate 30% of the full cost of your system…with no dollar cap.
For 2009 and 2010, Congress created an amazing tax credit of 30% of the cost of qualified energy efficiency improvements such as water heaters, furnaces, insulation, roofing, exterior windows and doors, and other items, limited to $1,500. Up to $5,000 in qualified improvements could cost as little as $3,500 after tax.
Didn't take advantage of it? A tax law change extended the credit through 2011, but at a much lower rate. The prior 30% credit has fallen to 10%, and the credit dollar ceiling has dropped from $1,500 to $500. There also are reduced caps for specific items. No more than $150 can be claimed for water heaters and furnaces, $200 for windows and $300 for biomass fuel stoves. Here's the real hurt: Credits claimed in prior years, including 2009 and 2010, will count against the $500 limit.
17. First-time homebuyer credit: If you bought a home during the first four months of 2010, you may qualify for either an $8,000 or $6,500 home buyer credit. And, you don’t really have to be a first-time home buyer to qualify for either credit. To qualify for the $8,000 credit you (and your spouse if married) must not have owned a home in the three years leading up to the purchase of your new home. The credit is 10% of the purchase price of the home, up to a maximum credit of $8,000. No credit is allowed for homes that cost more than $800,000.
To qualify for the $6,500 credit, you must be a long-time homeowner, defined as owing and living in the same principal residence for five of the eight years leading up to the purchase of your new home. The credit is 10% of the purchase price of the home, up to a maximum credit of $6,500. No credit is allowed for homes that cost more than $800,000.
Timing is everything. To qualify for either credit, you must have signed a binding contract on your new home before May 1, 2010, and you must have closed on the deal by September 30, 2010.
Unlike a first-time home buyer credit available in 2008 – which had to be paid back over 15 years by adding $500 in each of those years to the taxpayer’s tax bill – the 2010 credit does not have to be paid back, as long as you live in the principal residence for at least three years.
First-time homebuyer credit repayment. The $7,500 first-time homebuyer credit that was available for qualifying purchases after April 8, 2008, and before January 1, 2009, must be repaid starting with your 2010 tax return. To repay this “interest-free loan”, you must add $500 each year to your tax bill until the full $7,500 is repaid. If you sell or otherwise stop using the house as your home before the credit is fully repaid, any remaining balance must be repaid with your tax return for the year of the sale.
18. Home-equity debt: Interest on up to $100,000 of debt secured by your first or second home -- using a second mortgage, say, or home equity line of credit -- can be deducted, regardless of how the money is used. The use of home-equity debt gives homeowners an opportunity to skirt the rules that generally block the deduction of debt used to buy automobiles, for example, or pay for vacations.
19. Home-office deduction: You can deduct the costs of a home office that you use exclusively and regularly for business. This includes depreciation, utilities and insurance for the office portion of your home. To qualify for the tax break you must either meet with clients there regularly, or the home office must be your principal place of business (unless it is not attached to your house).
20. Home-sale exclusion: Up to $250,000 of profit from the sale of your home can be tax free; $500,000 if you are married an file a joint return. To qualify, you must own and live in the house for periods totaling two years out of the five years leading up to the sale. A reduced exclusion is available if you fail the two-year test due to unforeseen circumstances such as a move resulting from a job change, for example, or divorce. You can use this exclusion any number of times but no more frequently than once every two years.
21. IRA payouts for first-time homebuyers: You can withdraw as much as $10,000 from a traditional IRA before age 59½ without penalty if the money is used to buy the first home for yourself, a child or grandchild, or your parents or grandparents. Although the payout avoids the normal 10% early-withdrawal penalty, it is taxed. Different rules apply to tapping a Roth IRA for the purchase of a home. See Roth IRA payouts for first-time homebuyers.
22. Loan prepayment penalties: If your lender charges you a penalty for prepaying your mortgage early, the charge is deductible as mortgage interest.
23. Mortgage interest: You can deduct interest on up to $1.1 million of loans used to buy or build or improve your first or second home and secured by the property. Up to $1 million of such debt is called acquisition debt, which must be used to acquire or improve the property, and up to $100,000 more is called home equity debt, which can be used for any purpose.
24. Mortgage interest credit: If you received a mortgage credit certificate from a state or local governmental agency, you can claim a tax credit of up to $2,000 of mortgage interest paid.
25. Moving expenses: If a move is connected with taking a new job that is at least 50 miles farther from your old home than your old job was, you can deduct travel and lodging expenses for you and your family and the cost of moving your household goods. If you drive your own car, you can deduct 24 16.5 cents a mile for 2009 2010 moves. (For 20102011, the standard mileage rate for moving is 16.519 cents a mile.) If you moved to take your first job, the 50-mile test applies to the distance between your old home and your new job. The deduction is allowed even if you do not itemize deductions.
26. Parsonage allowance: For members of the clergy, the value of a home provided by the church is a tax-free fringe benefit. A housing allowance is also tax-free.
27. Points: Points you pay to get a mortgage for your principal residence are generally fully deductible in the year paid, even if you persuade the seller to pay your points for you. They are not deductible if paid as part of a refinancing a mortgage on your principal home or on a second home; in that those cases, you deduct the points over the life of the loan.
28. Presidentially declared disaster: If your home was damaged or destroyed in an area that the President declared a disaster area, special rules apply to the casualty loss deduction. For one thing, for 2009 losses the law waives the requirement that you reduce your loss by an amount equal to 10% of your adjusted gross income to arrive at the deduction. And, youYou may choose to deduct your loss in the year it occurred or the previous year, whichever is more advantageous. If you claim a 2010 loss on a 2009 amended return, for example, you’ll get your tax savings via a refund check from the IRS.
29. Real estate taxes (including property taxes): You can deduct state and local real estate taxes paid during the year on any number of personal residences you own. (A 2009 break that allowed homeowners who claimed If you choose to claim the standard deduction rather than itemize deductions, you can boost their standard deduction to include some of the property tax they paid was not renewed for 2010.) add $500 if single or $1,000 if married filing jointly to the regular standard deduction amount if you paid at least that much in state and local real estate taxes. If you own rental properties, real estate taxes on them are deducted on Schedule E where you report rental income.
30. Real estate taxes when you buy a home: If you bought a home during the year, check to see if the seller had prepaid property taxes for a period you actually owned the home. If so, include that amount in your property tax deduction for the year . . .even if you did not reimburse the seller.
31. Recreational vehicle: If your RV has cooking, sleeping and sanitation facilities, interest on a loan used to buy it can qualify as deductible mortgage interest on a first or second home. If you are subject to the alternative minimum tax, interest on an RV loan is not deductible.
32. Refinancing points: Generally, points paid when refinancing are deducted over the term of the loan. But if you refinanced a loan that you previously refinanced, you can deduct in full the as-yet-undeducted points remaining on the prior loan. There's a catch, however: If you refinanced with the same lender, the remaining points must be amortized over the term of the new loan.
33. Rehabilitation credit: If your residence is certified by the government as a historic building, you can claim a tax credit for 20% of the cost of renovating it. The renovation must be substantial, and the expenses must be incurred within a 24-month period.
34. Reverse mortgage: Amounts received under a reverse mortgage -- either a lump sum payment or periodic payments -- are tax free. Interest that accrues on a reverse mortgage is not deductible until it is paid, and then only interest on up to $100,000 of debt can qualify.
35. Roth IRA payouts for first-time homebuyers: Because the rules for the Roth IRA allow you to withdraw contributions at any time without penalty, the Roth can be a powerful tool for saving for a first home. Say you and your spouse each put $5,000 a year into a Roth for five years. The entire $50,000 could be withdrawn tax- and penalty-free for a down payment and, because the accounts have been opened for at least five years, up to $10,000 of earnings can be withdrawn tax- and penalty-free if used to buy your first home.
36. Serial refinancers: If you refinanced in 2010 and paid off a home mortgage you acquired when refinancing to pay off an earlier mortgage, any as-yet-undeducted points on the previous refinancing may be deductible on your 2010 return. See nr 32: Refinancing points.
37. Tax-free profit: See nr. 20: Home sale exclusion.
38. Tax-free profit on vacation home: Because you can use the home-sale exclusion repeatedly, it's possible to make profit on a vacation home tax free. If you move into the place and live there for two of the five years prior to selling it, you can qualify to claim up to $250,000 of profit tax free (up to $500,000 if you are married and file a joint return).
A recent change in the law, however, has diluted the potential value of this break. For vacation homes converted to principal residences after December 31, 2008, a portion of the gain will be taxed. The taxable part will be based on the ratio of the time after 2008 when the house was a second home or a rental to the total time you owned it.
39. Tax-free rental income: If you rent out your home for 14 or fewer days during the year -- when there's a major sporting event or political convention in your hometown, for example -- the rental income is tax-free, regardless of how much you make.
40. Vacation home: Mortgage interest on your second home is deductible, just as it is for your principal residence. Property taxes can be deducted on any number of homes. If you rent the place for 14 or fewer days during the year, the rental income is tax-free to you. If you rent it for more than 14 days a year, you must report the income, but also may claim deductions for rental expenses.
Talk to your tax adviser to properly implement these tax breaks.