If you purchase your home before year end, you are eligible for a few tax breaks which will offset your taxable income. In addition, you’ll be able to apply several tax breaks to your 2013 tax return when tax rates are scheduled to rise given President Obama’s recent victory. Find out the tax benefits for purchasing a home now.
The mortgage interest tax deduction
If you itemize deductions on your tax return, which you should do if the total amount is greater than the standard deduction, then you can deduct the interest payments made during the year on your first or second home. Interest is deductible on the first $1 million of debt. Please note that if you purchase at the end of the year, your deduction won’t be as large as it will be in 2013, since you’ll only have a month or two of mortgage interest payments paid. To claim the deduction, your lender will send you a form 1098 in January which will support the itemized deduction you claim on schedule A of your form 1040 for when its time to file your tax return.
Private mortgage insurance (PMI)
If you made private mortgage insurance payments (PMI) and your adjusted gross income is $100,000 or less, you may be eligible for the deduction. If your income exceeds those thresholds, 10% of the PMI deduction is reduced for every $1,000 over the adjusted gross income limit. This means that the tax deduction completely phases-out at $109,000.
If you paid points, which is typically 1% of the loan for each point, it is fully deductible in the year it is paid. This can be a significant deduction on homes with loans over $500,000. Also, you can even deduct the points if the seller agreed to pay the points for you as you are now liable for the mortgage.
Property tax payments are generally deductible on your tax return, whether it is for a primary residence or vacation home. Please note that you can only deduct property taxes that are actually paid, not money set aside in an escrow account to eventually pay for property taxes. Property tax rules are detailed in IRS publication 530.
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