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Mortgage interest

Mortgage interest is one of the last remaining personal interest deductions that our tax laws allow, so use it. You enter the amount your lender reports to you on line 10 of Form 1040, Schedule A.

Points

Using taxes to reduce taxes

If your house payment includes an escrow amount for payment of taxes, the annual information you get from the bank is a good way to check that those property taxes were paid. You certainly want to ensure that the state or local tax collector doesn’t come looking for you. But you also want to keep track of this amount so that you can include it as a deduction on Schedule A. These taxes will be an annual deduction as long as you own your home. But if this is your first tax year in your house, dig out that settlement sheet given to you when you closed the deal. You will find additional tax payment information there. When the property was transferred from the seller to you, the year’s tax payments were divided so that each of you paid the taxes for that portion of the tax year during which you owned the home. Your share of these taxes is fully deductible.

Escrow caution

For example, you buy your house on July 1. Your property taxes are due on Jan. 1 each year. When you closed, the seller had already paid the year’s taxes of $1,000 in full so you reimbursed the seller half of his annual tax payment since you are the owner for the last six months of the year. Your $500 reimbursement to the seller is shown on your settlement documents.

Table of contents

The closing document also shows you prepaid another $500 to the lender as escrow for the coming year’s taxes due next Jan. 1. The $500 you reimbursed the seller at closing is deductible on this year’s tax return, but the $500 held in escrow is not deductible until it is paid the next year.

Home equity loans

For example, you bought your home five years ago, your mortgage balance is $95,000 and the house’s fair value is $110,000. To pay for your daughter’s college tuition and buy her a car so she can get to school, you take out a home equity loan of $42,000. In this case, your interest deduction would is be limited to $15,000. This is the lesser of the $100,000 limit or $15,000 — the amount that your home’s fair market value of $110,000 exceeds the existing mortgage debt of $95,000. The IRS considers the interest on the $27,000 of the loan that is over the home equity debt limit ($42,000 minus $15,000) as nondeductible personal interest. So while you generally can get some tax benefit here, you need to keep in mind what your loan deductibility limits are when you consider a home equity loan.

When you sell

You can only take this exclusion every two years. And the IRS requires that you own and live in the house as your principal residence for at least two of the five years prior to its sale. If you must sell before you meet the IRS ownership and residency requirements, you can still get a partial exclusion on any profit. To qualify for prorated tax relief, your home’s sale must be because of a change in your health, employment or unforeseen circumstances.

What s not deductible

You’ve probably noticed that a portion of your house payment goes into escrow so your bank can pay your property insurance bill. Unfortunately, that insurance fee is not tax-deductible. Neither are FHA mortgage insurance premiums, homeowner association fees, any additional principal payments you make, maid service costs, depreciation of your home or your utility charges. So even though you still have to pay the electric bill and hire the kid down the street to mow the lawn, it’s a small price to pay to have your own place and get all the tax breaks that come with it. Did you know?
In total, more than 60 percent of Americans own their homes. That figure increases as Americans age, with more than 80 percent over the age of 65 owning their homes. Related Links: Related Articles: Taming mutual fund taxes SHARE: Bankrate.com

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