Tax Breaks for Homeowners

Buying your first home can give you a great feeling of starting a new chapter in life, of having “arrived.” Make no mistake, however: owning a home is a huge financial responsibility, probably the biggest you’ll ever have. There are mortgage payments, insurance, property taxes, maintenance costs...the list goes on. 

The federal government knows just how big a deal owning a home is, so the tax law provides some ways for your home ownership costs to cut your taxes. Certain expenses are deductible, provided you itemize deductions. Let’s look at some of these deductions. 

Deducting Mortgage Interest 

Usually, you can deduct the entire part of your payment that is for mortgage interest if you itemize your deductions on Schedule A (Form 1040). You cannot, however, deduct the mortgage insurance premiums. Your deduction for home mortgage interest is subject to a number of limits, however. See the IRS publication 936, “Home Mortgage Interest Deduction,” for more information. 

You should receive Form 1098 or a similar document from your mortgage lender stating how much interest you paid for the year. When you do your taxes with 1040.com, complete the Form 1098 screen. If you didn't get a Form 1098, complete the Deductible Mortgage Interest screen. Complete only one of these screens, however, not both. 

Deducting Home Equity Loan Interest 

Interest on home equity loans and lines of credit is deductible only if the borrowed money is used to buy, build, or improve the taxpayer’s home that secures the loan. The loan must be secured by the taxpayer’s main home or second home (qualified residence) and meet other requirements.  

Borrowing against your home for any other purpose, such as repaying credit card and various other debts, is not deductible. 

Deducting Real Estate Taxes 

You can deduct real estate taxes imposed on you. You must have paid them either at settlement or closing, or to a taxing authority (either directly or through an escrow account) during the year. 

Note: Real estate tax is also deductible, but beginning with 2018 returns, the total of all state and local taxes is limited to $10,000 ($5,000 if married filing separately. Included in this total are state and local income taxes, real property taxes, and personal property taxes. 

The tax for your home is often included in your mortgage payment. Your mortgage holder will hold the tax amount for you until it’s time to pay the tax and will make the payment for you. If this is the case, the mortgage holder will send you a statement showing how much real estate tax was paid for your property. 

As with home mortgage interest, enter the real estate tax on our Form 1098 screen (or the Interest You Paid screen if you didn’t receive a Form 1098). 

Private Mortgage Insurance 

Private mortgage insurance (PMI) premiums are no longer deductible as part of the mortgage interest deduction. PMI is not deductible for tax years after 2021. 

Deducting Points 

A point refers to certain charges paid or treated as paid by you to get a mortgage. Your mortgage documents should list the charges that are included. 

When deducting points, you have a choice: you can either deduct them all at once, for the tax year paid them, or you can stretch them out, deducting a percentage each year you have the mortgage.