If you are a first-time homeowner, you may not know what to expect when it is time for tax season. Even if you are an experienced homeowner, it can be confusing to understand all of the tax jargon. There are so many different pieces of terminology, including words such as deduction, itemized versus standard and more. This can be overwhelming, leading to missing out on a much larger refund each year after filing your taxes without the necessary deductions. Thankfully, you can understand answers to many of your questions and more below for what to expect during tax season.
Deductions Versus Tax Breaks
It is important to first understand the differences between tax breaks and deductions before getting into what you can expect. A deduction is an expense that you personally paid for that can be subtracting from your income. A tax break is for a group of people who will receive a tax reduction due to their status. There are many deductions that are available for homeowners, but you can also receive tax breaks. This is done by claiming your deductions below in an itemized method rather than a standard method.
Deductions on Interest
You probably know that there is excessive interest on your mortgage payments and loan. Most of the time, as a homeowner, this is built into your monthly payment amount. This year, you should know that you can deduct up to $750,000 of this interest if you are married, filing jointly and $350,000 if you are single. It is important to note that if you are a recent first-time homeowner, you will receive the biggest deduction after your first year of ownership. The deduction is also only applicable to primary and secondary residences.
Deductions on Property Tax
Each year, you are able to deduct up to $10,000 on the state and local taxes on your home. These can be taxes directly on your home, mortgage taxes and real estate taxes. You can utilize this deduction, thankfully, whether you pay your taxes through an escrow account and if you pay your taxes as a lump sum each year to the state and county. You are also able to deduct any taxes that were paid when you closed on your home, as long as this was after the year 2019 and you have the settlement documentation.
Deductions on PMI and MIP
There are two types of insurance that are commonly purchased by homeowners for their places of residence, including private mortgage insurance. Private mortgage insurance is a type of insurance required for homeowners who put less than a 20% down payment and is currently able to be claimed through 2020 with an origination date of 2006 or later. Your income has to be at most $100,000 to claim the full deduction, though it is reduced after this. You are ineligible for this deduction if you make over $109,000, however.
It is important to note that there are certain finances regarding homeownership that are completely non-deductible on your taxes. Though PMI is deductible, homeowner insurance is not deductible on your taxes, nor is title insurance. You should also note that your regular mortgage premium payments are not deductible as they are simply part of what you have to pay in order to own your home. You also should note that utilities are non-deductible as these are a separate bill, to begin with and they are necessary to living comfortably, Finally, you are unable to deduct any homeowner's association dues that may be associated with your neighborhood.
This tax season it is important to be prepared so that you can ensure that you will receive the maximum refund possible. Ensure you have determined whether you want to claim your deductions in a standard or itemized method, and begin gathering all of the paperwork that you need. Make sure to enter the appropriate information so that you can receive a PMI deduction, if eligible, a mortgage interest deduction, and a property tax deduction. This will help you get your money back and know what exactly to expect during this next tax season, whether you are a new homeowner or an experienced one.