Some Tax Tips for Home Buyers

The following tips are provided by Tax Masters, Inc., who came to speak with us in February. Thanks for the advice!

There are many favorable tax treatments available after you purchase your home. The most important one is that the home ownership tax deduction items such as mortgage interest and real estate taxes can allow you to take the advantage of claiming an itemized deduction instead of the fixed amount standard deduction. If you are in the most common federal 25% tax bracket and subject to 10% DC tax, a $1,000 itemized deduction means $350 tax savings. 

·        Mortgage interest alone is the biggest tax deduction available for most tax payers. You can deduct interest of up to $1 million debt used to purchase your home.
·        You can also deduct home equity loan interest of up to $100k. This home equity loan can be used to pay off credit cards or other high interest debts.
·        Certain "points" you paid are deductible the same as mortgage interest. The points are usually a percentage of the loan amount. It normally shows on your mortgage interest statement or on the home purchase HUD-1 Settlement Sheet.
·        Real estate taxes you paid for your residence are another item that can be deducted in your itemized deductions.
·        Mortgage Insurance premiums paid in connection with the debt incurred for home purchase is also deductible in this schedule.
·        Charitable contributions of either cash or goods can be deducted if you are claiming itemized deductions.
·        Job-related expenses and other misc. deductions over 2% of your Adjusted Gross Income can also be deducted in this schedule.




There are other tax advantages that a home owner can also enjoy:
·        Married taxpayers who file jointly can keep up to $500k home appreciation tax-free if you have lived in the house for 2 of the past 5 years. Single taxpayers can enjoy up to $250k capital gain tax-free.
·        If you withdraw cash from traditional IRAs before age 59 1/2 to purchase or build  a first home, a 10% early withdrawal penalty can be waived for up to $10k.