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Homeownership and Taxes

Part of the Great American Dream is owning a home. Attached to that experience are interest fees and tax implications. While purchasing a home is something that many individuals think about as they graduate from school, get married, and decide to raise a family, the aftermath of owning a home isn’t a thought that commonly comes to mind at the same time.
While home ownership is certainly an achievable feat for many individuals today, it doesn’t come with a manual that informs you of all of the ins and outs of having a home along with all of the accompanying bills and taxes. For homeowners who qualify, itemizing some of the expense of home ownership on tax returns can lead to a savings in the amount of taxes due to the government each year.  

What Can You Claim from Your Home Purchase for Income Tax Purposes?

Each of the following costs is generally deductible at the origination of your mortgage or deed of trust for a first or second home as well as throughout your home ownership: 

  • Points/loan origination fees (prepaid interest)
  • Mortgage interest
  • Real estate taxes (including the portion paid at the time of settlement)

If each of the following requirements is met, the full amount of the points paid to obtain the mortgage or deed of trust can be claimed in the year that the home was purchased:

  • The taxpayer claiming the deduction is responsible for the mortgage.
  • The taxpayer completes his tax return using the cash method of accounting.
  • The practice of paying points is commonly required by mortgage lenders in that locale.
  • The taxpayer provided additional funds above the cost of the points at the closing.
  • The points are clearly listed as points on the documentation for the settlement.
  • The points were paid simply to obtain the loan.
  • The loan was acquired for the purchase or construction of a main home.
  • The points were calculated as a percentage of the mortgage that includes only the principal.

Home Purchase Documentation for Tax Reporting on Schedule A

Once you decide to purchase a home, you are entitled to claim certain expenses on the itemized list of deductions that you choose to claim on Schedule A. Of course, as with any deductions that you claim, you will need the proper documentation. Your tax-deductible mortgage interest is listed on Form 1098 (Mortgage Interest Statement), which your lender will issue to you. This form may also list your tax-deductible real estate taxes if you pay them through your mortgage company.

Expense Tracking for Taxpayers

Documenting your expenses for use with your tax return can be a time-consuming activity, especially if you haven’t prepared for it since the beginning of the tax year. Keeping a comprehensive summary throughout the year of all applicable expenses can simplify the search for documentation, while also easing the actual completion of your taxes. No longer do self-employed individuals need to dread tax time each year because of the need to gather necessary documentation for business deductions and expenses. With an expense-tacking program, they can have all of the documented data right at their fingertips.

Recurring Expenses

Recurring expenses are often easiest to keep track of since they occur each month. Quite frequently, the amounts are the same, simplifying the process even more. Items such as mortgage interest and home equity interest vary in amount, so it is important to list each month’s value separately. Alternatively, you can wait until you receive your interest-paid statement from the lender at the end of the year

Expense Tracking Options for Taxpayers

While you can keep track of your expenses the old-fashioned way using paper and pen, you have the option of using a spreadsheet or specialized financial software as well. The method you choose is a personal choice that you can make based upon your level of comfort using each one.
Instead of sorting through a shoe box filled with receipts, you can refer to your expense-tracking report. Your expenses are categorized, enabling you to save time, stay organized, and maximize your tax refunds. Using specialized software to track your expenses enables you to keep good records that are readily accessible at any give moment.

The Benefits of Expense Tracking

The primary benefit of tracking your financial expenditures is that you have your expenses at your fingertips when you need them to calculate your income tax. Plus, you never need to waste time trying to recreate your expense list for your business expenses, mileage costs, or home ownership expenditures (interest fees, real estate taxes, etc.). Your business expenses, medical costs, charitable donations, and so on are preserved and summarized, enabling you to have your income taxes completed easily and without delay.
You can select your records according to a beginning and end date that allows you to access all of your expenses for the year with a few simple keystrokes rather than compiling the data yourself with paper and pen. Expense tracking simplifies maintaining reports for mileage, expenses, and taxes (estimated payments, property, and real estate) so that you can concentrate on additional matters of importance.

Tax Guide for the Military

If you are in the military, then some of your income is taxable, while some of it is not. Nonetheless, even if some items of your military pay or allowance are not taxable and are not included in your gross income, they may need to appear on your tax return.

What Types of Pay and Allowances Are Excluded from Gross Income for the Military?

Some of your income is excluded from income tax deductions f you are a member of the United States Armed Forces who is serving in a combat zone. Withholding for Medicare and Social Security is still implemented.
The following types of pay are excluded from income tax deduction while in a combat zone: 

  • Imminent danger pay.
  • Active duty pay earned in a combat zone while serving.
  • Bonus for reenlistment that is received while you are serving in a combat zone.
  • Accrued leave pay earned while you are serving in a combat zone
  • Pay received for non appropriated fund activities (clubs, station theaters, post theaters, messes, etc.) while you are serving in a combat zone.
  • Student loan repayments earned with a full year’s service that is attributable to time served in a combat zone.
  • Awards received for scientific accomplishments, inventions, and suggestions made during time served in a combat zone

Military personnel are entitled to claim the exclusion for the entire month even if only one day of any given month was spent serving in a combat zone.

Earned Income Credit and Additional Child Tax Credit

In the event that members of the Armed Forces serving in combat zones wish to contribute to their IRAs, they can do so even if the money they are using has already been excluded from gross income. Additionally, nontaxable combat pay can be included when calculating the earned income credit or the additional child tax credit if desired.

Primary Home Sale for the Military

A suspension of the 5-year period for the determination of whether or not the gain from the sale of a primary home can be excluded from income tax may occur while an individual or spouse is serving as a member of the Armed Forces on qualified official extended duty.

Deadline for Filing a Tax Return for the Military

Members of the Armed Forces are entitled to a 180-day extension for the filing of their income taxes from the last day of qualifying combat zone service or the last day of hospitalization resulting from qualifying injury sustained in combat zone service.

Home Equity Loans and Tax Deductions

Many homeowners find themselves taking out a home equity loan at some time or other during their lifetime, especially once their initial mortgage has been paid off. Home equity loans offer easy access to ready cash that can be used for any number of purposes including making home improvements, buying a second home or vacation property, or consolidating outstanding debts.

What Qualifies as a Home Equity Loan?

A home equity loan is secured by your original, qualified home. It is debt that is not treated as primary home acquisition debt or grandfathered debt. 

Declaring Home Equity Loan Debt as a Deduction on Your Income Tax Form
  • When you take out a home equity loan, it is possible that you may be able to declare the interest that you pay as a deduction on your income tax. In fact, most home equity loans include tax-deductible interest fees. However, certain limits are in place for the actual amount that you can declare on your income tax return.
  • When you take a home equity loan out for the purposes of making home improvements, then the limits attached to the amount of debt that you can claim as home equity debt is high, and what you can claim in interest charges is related to that. In fact, this limit is typically up to the value of the home that you are using as collateral on the home equity loan.
  • If you are taking out a home equity loan for the purpose of consolidating all or most of your outstanding debts, then the highest amount of debt hat you can claim as home equity debt is typically limited to $100,000 if married filing jointly or $50,000 if married filing separately.
  • When you take a home equity loan out for the purposes of purchasing a second home, then the rules are a bit different. In this scenario, the amount of the newly acquired debt that you can claim as home equity debt is the smaller of either $100,000 if married filing jointly ($50,000 if married filing separately) or the total of the fair market value for each home minus the combined amount of the home acquisition debt and the grandfathered debt as determined on the date that the newest loan was obtained.
Where Do You Include the Deduction for Home Equity Loan Interest?

If you qualify to take the deduction for the interest on a home equity loan, then you can include this information on Schedule A of your Form 1040.