Tax Deductions for Frederick Homeowners
There are tax advantages to home ownership. Tax deductions for homeowners have been in place for generations, because owning a home is generally considered to encourage better neighborhoods and good citizenship in many ways. Although the details change periodically, the basic tax deductions and benefits for homeowners who itemize deductions are typically these:
1. Mortgage Interest Deduction, or MID. The MID is the most well-known benefit of home ownership. The interest you pay on your mortgage is deductible (on a mortgage with a balance of up to $750,000). This includes your main home and a second home.
Keep in mind that with the new Tax Law your total deductions are capped at $10,000. [Did you know a boat can be considered a second home…if it has a kitchen, bedroom and head. You can deduct mortgage interest paid on it. The same is true for an RV.] Homeowners benefit the most in the first half of the life of their mortgage, when the bulk of the monthly payment is interest. (Consult the IRS website for the rules regarding MID)
And…if you pay a penalty for prepaying your mortgage, that penalty is deductible as mortgage interest.
The congressional Joint Committee on Taxation (JCT) estimated that the cost of the mortgage interest deduction will shrink from $72 billion to $41 billion, because of the lower cap on deductible mortgage interest and because other provisions will result in many fewer taxpayers itemizing their deductions. For many middle class homeowners the personal exemption exceeds the total of itemized items.
2. Private Mortgage Insurance (PMI). When the downpayment is less than 20%, there is usually Private Mortgage Insurance. This provision has been phased out for both single and married filing jointly with adjusted gross incomes over $100,000. The provision allows homeowners to treat mortgage insurance premiums the same as interest. This deduction only applies to mortgages (not refinances) which began after 2006.
3. Points and Origination. If you purchased in the last year you can deduct any points or origination fees. They are generally deductible for the purchaser/borrower, whether or not they are paid from the borrower’s funds or the seller’s funds at settlement, so long as they meet specific tests.
If you Refinanced: These items usually must be amortized over the period of the loan (for example, 1/360 for each month of a 30-year loan). However, if you sold or refied again in 2015, you can deduct whatever amount remained from your earlier refi if you refinanced with a different lender. Unfortunately, if you refinanced with the same lender, the points must continue to be deducted over the life of the loan.
4. Home Improvement Loan Interest. The interest on a home improvement loan is not typically tax deductible after recent legislation.
If your home is a government certified historic home, you can deduct a portion of the cost of renovating it. Check for national and Maryland tax credits.
5. Energy efficient repairs and upgrades may be deductible, or you may get tax credits, these provisions seem to change often over the years. Homeowners can deduct the cost of materials used for energy efficient upgrades to their homes, with various limits and percentages. There are also individual limits for certain items, like appliances, furnaces, windows, etc. Consult the IRS website, or a tax professional.
Cost of Repairs vs. Improvements:
It is essential to understand that the IRS treats Repairs vs. Improvements differently.
- An Improvement is something that makes a property more valuable to own and improvements are deducted over the course of multiple years.
- A repair is required maintenance to keep the property functioning normally and can be deducted immediately in the tax year of your home sale.
If you needed to make home improvements in order to sell your home, you can deduct those expenses as selling costs as long as they were made within 90 days of the closing.
6. The cost of selling real estate is deductible. If you sold your home, Fees, capital improvement, commissions and marketing costs are deductable. Another reason to safeguard that
HUD 1 …er… Closing Disclosure document!
7. A home office is deductible. Taxpayers have a simplified option for taking a deduction for home office expenses now. The optional deduction is $5 per square foot for up to 300 square feet of home office space, to a maximum of $1,500. Taxpayers still have the alternative of the more complicated Form 8829 if they think the extra effort will provide a larger write-off. With all the myths surrounding this deduction, be sure to consult a tax specialist.
8. Property Tax Deduction. Yes, a tax is tax-deductible:)
9. The Mortgage Debt Forgiveness Relief Act of 2007 has not been extended for 2019. An underwater homeowner who short sells their home owes taxes on the amount of debt they were forgiven. The government usually considers debt forgiveness as income in these cases.
[Tax specialists have reported to me that even without this extension, most of the time, taxes won’t be owed when the short seller can document insolvency.]
10. Capital gains under $250,000 for individuals and $500,000 for married couples are not currently taxed. If you owe capital gains after selling real estate, it’s a bit complicated, so you’ll want to consult a tax professional before you sell.
For an excellent article explaining capital gains, read: Real Estate Capital Gains and Your Home Sale, by Real Estate Agent Bill Gassett, Greater Metrowest MA.
Bill explains the changes that came with The Tax Payer Relief Act of 1997, the requirements and the exclusions. The actual amount takes some figuring, it’s not just a matter of your sale price.
Some Extra’s via Kiplinger
11. Casualty Loss. If your home was damaged due to storms or fire, or other natural disaster, you may be able to deduct the unreimbursed casualty loss on your return.
12. Although it is a rule that you must live in your home for 2 of the previous 5 years to be exempt from the Capital Gains tax, you may be able to use a reduced exclusion if you fail the two-year test due to unforeseen circumstances. These circumstances could include a move resulting from a job change, for example, or divorce. You can use this exclusion any number of times but no more than once every two years.
13. If you have moving expenses and you moved more than 50 miles away for a new job, you can deduct them, along with travel expenses, including hotel and food.
FYI: The IRS no longer automatically sends out tax forms due to the cost and the fact that so many people file electronically. If you want paper forms, libraries, post offices and IRS walk-in centers still have them. Of course, you can conveniently get them at the IRS website, www.irs.gov. You can also call 1-800-TAXFORM (800-829-3676) to have forms mailed to you.
As a disclaimer and as good advice: Always seek the advice of a Tax Specialist concerning tax deductions for homeowners.
Maryland’s Homeowners’ Property Tax Credit Program
The State of Maryland has developed a program which allows credits against the homeowner’s property tax bill if the property taxes exceed a fixed percentage of the person’s gross income. In other words, it sets a limit on the amount of property taxes any homeowner must pay based upon his or her income. Read more about it.
Need A Good CPA?
Elliott CPA LLC, here in Frederick Maryland, located at 237 W Patrick St. Phone: (240) 439-4095 Melinda Elliott has been helping people with tax filings for 19 years. Business Taxes, Personal Taxes, and resolving tax problems are among her services. Be sure to read Melinda’s newsletter with the latest tax information.
Enjoy Our Slide Presentation of Tax Deductions for Homeowners: