Being a first-time home buyer comes with a learning curve. Part of that involves understanding property taxes and any exemptions or tax breaks you may be entitled to.
These are very specific to location, filing status, value, and many other scenarios. The best way to be certain of what you may get back during tax season is to consult a tax professional.
However, you can read further to get an idea of your options.
Tax Breaks and Deductions
A deduction is an expense you incur throughout the calendar year that you end up subtracting from your total income to determine how much you owe in taxes.
Very similarly, a tax break decreases the taxpayer’s liability. This term is also used to refer to a group of persons who may receive favorable tax treatment.
Also, a tax exemption screens a certain portion of income or type of income from taxation.
To be eligible for homeowner related tax breaks, you must opt for itemized deductions versus the standard deduction. Only opt for this if your itemized deductions are more than the standard deduction.
A standard deduction is a fixed dollar amount based upon your filing status. Itemized deductions allow you to pick and choose what will lower your tax bill the most.
Mortgage Interest Deduction
Every year you pay interest on your mortgage as it is prorated into your monthly payments. You are able to deduct this interest up to $750,000 if filing jointly and up to $350,000 if filing single. This applies if you bought your home after December 15th, 2017.
This deduction only works if the home is your primary residence or a second home. It also applies to home improvement and home equity loans. This only stands if the equity was accessed to be used on the home.
Your biggest interest deduction is usually during your first year of homeownership. That is because your loan is amortized and consists of less interest and more principal than each payment before.
Property Tax Deduction
In addition to the mortgage interest deduction, homeowners are eligible to deduct up to $10,000 paid on state and local taxes. This includes your Real Estate taxes.
This applies whether your taxes were paid through escrow or directly to the taxing authority.
Additionally, if you purchased your home is 2019 or sooner, you can deduct any Real Estate taxes you paid at closing. You will need a copy of your settlement statement.
PMI or MIP Tax Deduction
Private mortgage insurance, or your mortgage insurance premium, is a payment added onto your monthly mortgage paid to your lender if you made a down payment of less than 20%.
Recently, with the passage of the Further Consolidated Appropriations Act, 2020, Congress extended this deduction through Dec. 31, 2020.
In order to qualify, the PMI policy’s mortgage has to be originated after 2006. The deduction is reduced once your Adjusted Gross Income exceeds $100,000 ($50,000 if married filing separately) and is completely eliminated with an AGI above $109,000 ($54,400 married filing separately).
What you cannot deduct
These are the other costs involved in homeownership that are non-deductible:
- Homeowner insurance premiums
- Principal payments
- Title insurance
- HOA dues
These are just the basic deductions that you will encounter as a homeowner. To accurately assess what other tax breaks you may be eligible for, consult a tax professional. And remember, your deductions added up may still not outweigh a standard deduction.