Tax Preparation and Home ownership can be one of the greatest satisfactions, yet comes with numerous upfront expenses. The IRS offers several tax breaks to make homeownership more affordable. To claim these deductions, you must itemize your deductions instead of taking the standard deduction. Mortgage interest and property tax are two common home-related deductions. Private mortgage insurance premiums could also save you money.
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Mortgage interest payments make up an important portion of most monthly homeowner payments and can provide a tax break when itemizing returns instead of taking the standard deduction, offering greater tax breaks overall. In order to receive the full benefit, homeowners will need to take the time to claim it. Unfortunately, however, this benefit doesn't happen automatically--they must take the initiative themselves in claiming this deduction! It takes more work, but it will give you bigger tax breaks.
According to the IRS, mortgage interest is only deductible if it's paid on debt used to purchase, build, or substantially improve a primary or second home. This can include refinancing debt secured by either your primary home or second home and home equity loans and lines of credit that serve the same purpose; only interest on improvement-related debt meets certain tests (like adding square footage or changing use).
Mortgage points, upfront fees charged by lenders to reduce your interest rate and thus decrease monthly payments, may also be deducted as pre-paid interest and included on Schedule A as an itemized deduction. To qualify, your effective interest rate must be reduced by at least 1%.
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One of the primary expenses associated with home ownership is paying property taxes to your local government. These taxes may seem expensive, but they are tax deductible. They can help offset the high cost associated with homeownership in some regions. To take advantage of the deduction, homeowners must itemize and exceed their standard tax deduction.
Homeowners who itemize can also deduct state and local income, property and sales taxes. The combined limit is $10,000 ($5,000 for married filers filing separate returns) of state and local taxes. This does not include transfer taxes or homeowners associations fees, which are typically included in closing costs deductions.
If you use part of your home for business use, such as an office or studio, expenses related to that use could be tax-deductible. This deduction is available for single-family homes, townhouses apartments, condos, co-operative apartments and even mobile and manufactured houses!
Medically necessary home improvements such as wheelchair ramps or grab bars in bathrooms may qualify for tax deduction. You can also benefit from energy-efficient upgrades such as solar panels or windmills. However, to qualify for this deduction, you must have a letter from a physician certifying that the improvement is medically necessary.
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No matter if you work from home or run a small business out of your house, the IRS allows you to deduct some expenses related to your home office from your living expenses. There are two methods you can use for claiming the deduction: regular and simplified. The amount of space in your home that is designated as an office will ultimately depend on whether or not it meets the requirements for a deduction (refer IRS Pub 587 Business Use of Your House for details).
For a home office to qualify, it must be an area that is exclusively and regularly used for your business or to treat patients or clients. It could be any room, an area within a room or even an outlying structure such as a shed, garage or guest house - even an entire structure on your property!
Alternatively, for simpler calculations that don't exceed $300 of expenses you may use the simplified method - just keep receipts for any furniture, appliances or equipment purchased specifically for the office space.
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The IRS allows you to deduct the mortgage points that you pay at closing when you purchase a home using a mortgage. Each point costs about one percent of the loan amount, and it reduces your interest rates by 0.25 percentage points. These deductions should typically be spread evenly over the loan term period; however, https://www.getridoftaxes.com/how-should-i-prepare-documents-for-a-tax-preparation-service under certain conditions they can also be deducted all at once in one year.
To take advantage of the mortgage point deduction, it is best to itemize rather than taking the standard deduction. Your lender should issue you an annual 1098 mortgage interest statement which details how much interest was paid as well as an itemized breakdown of any points paid; box 6 of that document shows this figure. Property taxes paid out of escrow can also be deducted, provided that your municipality accepts this method of paying bills.
Home ownership offers you additional tax breaks. These include energy-efficient credits, deductions for home equity loan used to improve your house and meet certain standards and criteria. To qualify, improvements must meet significant and specific criteria - this could include making it accessible for people with disabilities or grading the ground accordingly.
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