Taxes 101: Three common homeowner deductions you need to know
April 15 is coming around the corner, and many homeowners are scratching their heads trying to remember what kind of tax deductions they can claim. This quick primer will give you insights you can use to understand three common tax deductions on your Minnesota or western Wisconsin home.
Keep in mind that everyone's finances and taxes differ. The following deductions are meant as an overview and may not apply to your personal tax situation. You should always work with a professional tax specialist or service when calculating your taxes and deductions.
Mortgage interest is one of the most common deductions for homeowner taxpayers, and it can also be one of the most lucrative. The amount of mortgage interest you've paid in 2015 will be provided to you by your lender.
"Deductible mortgage debt has a cap of $1.1 million, but that debt can be spread across multiple loans or properties. So if you have $300,000 in mortgage debt on your primary residence in Bloomington, and $250,000 in mortgage debt on your lake home in Siren, you can claim interest on both those residences," explains Edina Realty Senior Vice President Terry McDonough.
"One thing to keep in mind is that you can't claim a mortgage interest deduction if you have a home equity loan you didn't use to improve the property," says McDonough. "You have to use a home equity loan to make improvements or renovations to the house in order to deduct the mortgage interest from that loan."
If you pay private mortgage insurance (PMI), those annual payments are usually deductible. Private mortgage insurance is usually owed by homeowners who qualified for a conventional mortgage, but had a lower down payment. As a way to lower the lender's risk of default, the borrower pays PMI until they reach a certain level of equity.
Your lender will provide you with your annual PMI payments and your tax specialist can work with you to determine if you're eligible to deduct PMI from your taxes.
When you pay your mortgage each month, a portion of that is earmarked for property taxes. That money is held in an escrow account and the property tax payment is released from escrow annually. The amount of property tax you'll pay will be included on your lender statement, and is deductible.
"If you purchased your home last year, be sure to locate or ask your title company for the settlement sheet you received at closing," recommends McDonough. "When you purchased your home, the tax payments for the year were also divided. The seller owes for the portion of the year when they owned the home, and you owe for the portion of the year after you purchased your home. Be sure you only deduct your share of the taxes."
What does a deduction mean?
In short, a tax deduction lowers your taxable income. "If your mortgage interest, mortgage insurance and property tax payments totaled $10,000 in 2015, and you are in an effective tax bracket of 20 percent, your federal tax owed would be reduced by $2,000 by claiming these common homeowner deductions," says McDonough. "I always say that tax benefits are like letting the IRS make part of your house payment for you! It's a fantastic perk to being a homeowner."
Getting started on your taxes
The above are only three common tax deductions, but homeowners can benefit from myriad other deductions based on their income, length of homeownership and the type of use they have for their primary and secondary residences. Contact a tax specialist for even more information on tax deductions for homeowners.