First time home buyer this year? How to correctly file your taxes

Posted on February 10 2014

Buying a home can have many financial benefits, and sometimes you don't even realize how significant they are until many months after your home purchase. You probably realized right away that you're paying less on your mortgage than you would be on rent in a comparable home. You're also building equity, either through the gradual repayment of your mortgage or through an increase in the value of your home. Now, at tax time, you'll discover some additional benefits that can save you a lot of money on your taxes.

You don't need to be afraid of all the extra paperwork involved in filing your taxes as a new homeowner. Although you may be submitting a few additional forms as part of your tax return, all the numbers that go onto these forms are easy to obtain. Plus, the question and answer approach at OnePriceTaxes will guide you through the process one step at a time. You won't miss out on any of these ways that you might be able to save some money on your tax return after buying a home.

Before getting into the specific types of information you will need to have as you file your taxes, it's important to understand how you'll be saving money. Many of the costs of buying and owning a home help you qualify for tax deductions, which let you subtract money from your taxable income. However, to take these tax deductions, you will need to itemize your deductions instead of claiming the standard deduction. Some people may find after entering itemized deductions that the standard deduction amount is larger, which means that you should just take the standard deduction. This is especially likely to be the case if you purchased your home late in the year. You can always switch to itemizing deductions in future tax years if it is financially advantageous for you then.

Mortgage interest: The main tax deduction for homeowners is mortgage interest. Your lender will send you form 1098, which lists the total amount of interest you paid on your mortgage during the previous year. Especially in the first few years of repaying your mortgage, you may be surprised to learn just how much of your payments went to interest! The good news is that you can claim all the interest you paid as an itemized deduction.

Points: Some people opt to purchase one or more points on their mortgage, which buys down the interest rate. Any points you paid are completely deductible if you paid them on your mortgage to purchase or build your main home and you brought at least that much cash to closing. Look up your closing statement to find out how much you paid for points.

Mortgage insurance premiums: Many borrowers who have a down payment of less than 20% of the purchase price of the home are required to pay mortgage insurance. These payments help protect the lender if the home goes into foreclosure and has lost value so its sale does not fully cover the cost of the loan. All the money you pay for mortgage insurance, both upfront when you purchase your home and as part of your monthly payments, is deductible on your tax return. However, the deduction is phased out if your income is more than $100,000, or $50,000 if you're married filing separately.

Property taxes: Another cost you can list as an itemized deduction is the property taxes you pay. You can deduct the amount you paid in property taxes for the calendar year on the tax return. Depending on when you bought your house and how your jurisdiction bills property taxes, you may have paid some of the tax at closing and you may also have some tax paid through the escrow account on your mortgage.

Other itemized deductions: After listing all of your house-related itemized deductions on your tax return, you will also have the chance to list other itemized deductions. OnePriceTaxes will walk you through all the potential deductions, which include charitable contributions, medical expenses, state and local income tax or sales tax, and some job-related expenses. These deductions can definitely add up to let you write off a large chunk of your income for the year and shelter it from income taxes.

Energy efficient improvements: If you made improvements to your home in 2013 that made it more energy efficient, you may be eligible to claim a tax credit. The amount of the tax credit depends on what you installed and how much the materials cost, but it is generally 10% of the cost of the improvements. The credit also has a lifetime cap of $500, so if you have claimed it before, you may have to reduce the amount of the credit you can claim this year.

Other home improvements: Unfortunately, any other types of home improvements you make do not help you qualify for tax breaks this year. However, you should still hold onto the receipts for all home improvements. When you choose to sell your home, you can use the money you spent on improvements to offset your capital gains on the sale and help shield your profit from being taxed. Current IRS rules allow you to have non-taxed capital gains of $250,000, or $500,000 if you're married filing jointly.

As a first time home buyer, you may still feel like you're busy settling into your new home and completing improvements to make it into the home you have always dreamed about. However, you should not let your busy schedule keep you from itemizing deductions on your tax return. It is a simple process and allows most homeowners to pay less in taxes than they would if they claimed the standard deduction. A few extra minutes of looking up information about money you spent on your home could save you hundreds of dollars on your taxes.


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