Published: January 10,
2013
Mortgage interest deduction
One of the neatest
deductions itemizing home owners can take advantage of is the mortgage interest
deduction, which you claim on Schedule A. To get the mortgage
interest deduction, your mortgage must be secured by your home — and your home
can even be a house trailer or boat, as long as you can sleep in it, cook in
it, and it has a toilet. Interest you pay on a mortgage of up to $1
million — or $500,000 if you’re married filing separately — is deductible when
you use the loan to buy, build, or improve your home. If you take on
another mortgage (including a second mortgage, home equity loan, or home equity
line of credit) to improve your home or to buy or build a second home, that
counts towards the $1 million limit. If you use loans secured by your home
for other things — like sending your kid to college — you can still deduct the
interest on loans up $100,000 ($50,000 for married filing separately) because
your home secures the loan.
PMI and FHA
mortgage insurance premiums
Helpfully, the
government extended the mortgage insurance premium deduction through 2013. You
can deduct the cost of private mortgage insurance as mortgage
interest on Schedule A — meaning you must itemize your return. The change
only applies to loans taken out in 2007 or later. What’s PMI? If you have
a mortgage but didn’t put down a fairly good-sized down payment (usually 20%),
the lender requires the mortgage be insured. The premium on that insurance can
be deducted, so long as your income is less than $100,000 (or $50,000 for
married filing separately). If your adjusted gross income is more than
$100,000, your deduction is reduced by 10% for each $1,000 ($500 in the case of
a married individual filing a separate return) that your adjusted gross income
exceeds $100,000 ($50,000 in the case of a married individual filing a separate
return). So, if you make $110,000 or more, you lose 100% of this deduction (10%
x 10 = 100%). Besides private mortgage insurance, there's government
insurance from FHA, VA, and the Rural Housing Service. Some of those premiums
are paid at closing and deducting them is complicated. A tax adviser
or tax software program can help you calculate this deduction. Also, the rules
vary between the agencies.
Prepaid
interest deduction
Prepaid
interest (or points) you paid when you took out your mortgage is 100%
deductible in the year you paid them along with other mortgage
interest. If you refinance your mortgage and use that money for home
improvements, any points you pay are also deductible in the same year. But
if you refinance to get a better rate and term or to use the money for
something other than home improvements, such as college tuition, you’ll need to
deduct the points over the term of the loan. Say you refi for a 10-year term
and pay $3,000 in points. You can deduct $300 per year for 10 years. So
what happens if you refi again down the road?
Example: Three years after your first refi, you refinance again. Using the
$3,000 in points scenario above, you’ll have deducted $900 ($300 x 3 years) so
far. That leaves $2,400, which you can deduct in full the year you complete
your second refi. If you paid points for the new loan, the process starts again; you can deduct the points over the
term of the loan. Home mortgage interest and points are
reported on IRS Form 1098. You enter the combined amount on line 10
of Schedule A. If your 1098 form doesn’t indicate the points you paid, you
should be able to confirm the amount by consulting your HUD-1 settlement sheet.
Then you record that amount on line 12 of Schedule A.
Energy
tax credits
The energy tax
credit of up to a lifetime $500 had expired in 2011. But the Feds extended
it for 2012 and 2013. If you upgraded one of the following systems this year,
it’s an opportunity for a dollar-for-dollar reduction in your tax liability: If
you get the $500 credit, you pay $500 less in taxes.
·
Biomass stoves
·
Heating, ventilation,
air conditioning
·
Insulation
·
Roofs (metal and
asphalt)
·
Water heaters
(non-solar)
·
Windows, doors, and
skylights
·
Storm windows and
doors
Varying
maximums
Some of the eligible
products and systems are capped even lower than $500. New windows are capped at
$200 — and not per window, but overall. Read about the fine print in order to claim your energy tax credit.
Determine if the
system is eligible. Go to Energy Star’s website for detailed
descriptions of what’s covered. And talk to your vendor. The product or
system must have been installed, not just contracted for, in the tax year
you'll be claiming it. Save system receipts and manufacturer certifications.
You’ll need them if the IRS asks for proof. File IRS Form
5695 with the rest of your tax forms.
Vacation home
tax deductions
The rules on tax
deductions for vacation homes are complicated. Do yourself a favor and keep
good records about how and when you use your vacation home. If you’re the
only one using your vacation home (you don’t rent it out for more than 14 days
a year), you can deduct mortgage interest and real estate taxes on Schedule
A. Rent your vacation home out for more than 14 days and use it yourself
fewer than 15 days (or 10% of total rental days, whichever is greater), and
it’s treated like a rental property. Those expenses get deducted
using Schedule E. Rent your home for part of the year and use it
yourself for more than 14 days and you have to keep track of income, expenses,
and divide them proportionate to how often you used and how often you rented
the house.
Home buyer tax
credit
There were
federal first-time home buyer tax credits in 2008, 2009, and 2010.
If you claimed the
home buyer tax credit for a purchase made after April 8, 2008, and before Jan.
1, 2009, you must repay 1/15th of the credit over 15 years, with no
interest. If you used the tax credit in 2009 or 2010 and then sold your
house or stopped using it as your primary residence, within 36 months of the
purchase date, you also have to pay back the credit. Example: If you bought a
home in 2010 and sold in 2012, you pay it back with your 2012 taxes. That
repayment rules are less rigorous for uniformed service members, Foreign
Service workers, and intelligence community workers who get sent on extended
duty at least 50 miles from their principal residence. Members of the
armed forces who served overseas got an extra year to use the first-time
home buyer tax credit. If you were abroad for at least 90 days between Jan. 1,
2009, and April 30, 2010, and you bought your home by April 30, 2011, and
closed the deal by June 30, 2011, you can claim your first-time home buyer
tax credit. The IRS has a tool you can use to help figure out
what you owe.
Property tax
deduction
You can deduct
on Schedule A the real estate property taxes you pay. If you have a
mortgage with an escrow account, the amount of real estate property taxes you
paid shows up on your annual escrow statement. If you bought a house this
year, check your HUD-1 Settlement statement to see if you paid any property
taxes when you closed the purchase of your house. Those taxes are deductible on
Schedule A, too.
This
article provides general information about tax laws and consequences, but
shouldn’t be relied upon as tax or legal advice applicable to particular
transactions or circumstances. Consult a tax professional for such advice; tax
laws may vary by jurisdiction.
