If you bought a home in the past year, congratulations! We know that buying a new home is stressful, but that it’s also exciting and very rewarding. With tax season around the corner, it’s time to consider the federal tax implications of your purchase.
Here are a few tax tips:
Most Likely, You’ll Start Itemizing on Your Federal Return
For many non-homeowners, the standard deduction is a no-brainer – it’s easy and you barely have anything you could itemize anyway. Once you own a home, however, the math changes: You can deduct your mortgage interest payments. This deduction, in combination with other deductions, will often exceed the standard deduction.
In 2014, the standard deduction is $6,200 for taxpayers who are single or married and filing separately, $9,100 for head of household filers and $12,400 for those married, filing jointly.
How it Works
The larger your mortgage and the higher your interest rate, the more tax benefit you’ll receive. Let’s say you bought a home in 2014 with a $200,000 30-year mortgage at 4 percent interest, with your first mortgage payment due Feb. 1, 2014. In 2014, you paid $7,279 in interest. If you’re single, you’ve already exceeded the standard deduction. A larger mortgage and/or higher interest rate will increase your deduction, while a smaller mortgage or lower rate will lower it.
What Other Home-Related Expenses Can You Deduct?
As mentioned above, your mortgage interest is deductible (up to a balance of $1 million for everyone except those married filing separately, who have an upper balance limit of $500,000). You can also deduct your property taxes and any points you paid at the closing table to lower your mortgage rate. The interest on home equity loans and lines of credit is also deductible.
What Are Some Other Deductions?
Your state taxes are deductible on your federal return. Any charitable contributions you made this past year are also deductible, provided you have proper documentation. And there are other specialized deductions that may fit your situation. For example, if you have student loans, the interest on them can be deducted up to $2,500. Or you may qualify for an employee business expenses deduction if you had to temporarily commute to another city for work. For details about what additional deductions may apply to you, consult a tax professional. (Note: should you need to file under the Alternative Minimum Tax (AMT), many deductions, such as property taxes and state taxes, would no longer be available.)
Is It Worth It to Itemize My Deductions?
If all of your deductions add up to more than your standard deduction, you’ll receive tax savings by itemizing your return.
There are plenty of situations where a new homeowner would not find it advantageous to itemize. For example, if you and your spouse just bought a relatively inexpensive one-bedroom condo, your annual interest payments may not be large enough to justify itemizing your return, particularly if you secured a low interest rate. Again, ask a tax professional to help you decide whether to itemize.