Aside from having your own place and setting it up exactly how you want it, there are other benefits of buying a home, financial benefits. As a homeowner, taxes become more complicated than if you are renting but it is worth it when you see the money you will save at the end of the day.
How deductions work:
There are deductions and credits in the tax world. Credits are like a coupon, they are taken off of your bill. A tax deduction reduces your adjusted gross income, which then reduces your tax liability. So, if you’re in the 25% tax bracket, your tax liability will be reduced by 25% of the total claimed deduction. If you claim a $2,000 deduction you can expect your tax liability to drop by about $500.
The most common types of deductions include mortgage interest, real estate taxes, points and private mortgage insurance (PMI).
For the most part, you can probably deduct all of your home mortgage interest. There are some exceptions such as there being a $1 million yearly cap on the amount you can deduct but that probably doesn’t apply. You can even deduct late fees in many circumstances.
The money you pay in property taxes is deductible also. You’ll find the amount on your 1098 form if you pay for your taxes through a lender escrow account. If you pay directly to your municipality, you have personal records in the form of a check or automatic transfer.
With a new loan, you may have paid points to your lender. Points are normally priced as a percentage of the total. As long as you actually gave the lender money for these points, you will get a deduction. If you refinanced your loan, you get a deduction for points over the lifespan of the loan. Ever time you give a mortgage payment, points are put into the loan which can be deducted each month you made payments.
Private mortgage insurance: If you took out a loan in 2007 or later, you may be able to deduct your PMI. If you’re single and your gross income is less than $50,000, you’re eligible for the deduction. For those who are married, the starting point is $100,000.
For the full article on tax deductions when buying a home, click here.