Five Big Tax Breaks

Homeownership can pay off big time if you itemize your deductions. Use these five tax breaks to cut what you owe Uncle Sam:

1. Home Office

Do you work at home? Collect a tax break either by using the simplified method explained below or doing some complicated calculations to claim your exact home office expenses.

When you opt for the simplified method, you get $5 per square foot and can claim up to 300 square feet of office. (That’s a $1,500 deduction!)

The Fine Print:

• You can’t deduct a home office just because you head in there after dinner to read AOL and answer emails from co-workers.
• You have to use your home office “substantially and regularly to conduct business.”
• Your home office doesn’t have to be in your home. A studio, garage, or barn can count as a home office.

Where You Claim it:
Form 8829

Where You Read About it:
Publication 587 Business Use of Your Home

 

2. Energy-Efficient Upgrades

Energy-efficiency home upgrades you made in 2014 can potentially cut your tax bill by up to $500, thanks to the residential energy tax credit.

This tax credit lets you offset federal taxes dollar-for-dollar. You may be able to claim up to 10 percent of what you spent in 2014 on such items as insulation, a new roof, windows, doors or high-efficiency furnaces or air conditioners.

The Fine Print:

• There’s a $500 lifetime cap (meaning you have to subtract any energy tax credit you used in prior years).

Where You Claim it:
Form 1040, Form 5695

Where You Read About it:
Form 5695 Instructions

 

3. Mortgage Interest Deduction

This is the mother lode of tax deductions. You typically can deduct the interest you pay on your home loan of up to $1 million (married filing jointly). You have to use your mortgage to buy, build or improve your home.

Using a home equity line or mortgage for something else, like paying college tuition? It’s generally OK to deduct the interest on loans up to $100,000 (married filing jointly) as long as your home secures the loan.

The Fine Print:

• An RV, boat or trailer counts as a home if you can sleep and cook in it and it has toilet facilities (if you’re not sure what “toilet facilities” means, watching a couple episodes of the TV show “Buying Alaska” will enlighten and entertain you).
• Second home loans count toward the $1 million loan limit.

Where You Claim it:
Schedule A

Where You Read About it:
Publication 936 Home Mortgage Interest

 

4. Property Tax Deduction

The property taxes you paid to the state, the county, the city, the school district and every other government entity that reached into your pockets last year are usually deductible on your federal tax return.

If your mortgage lender paid your property taxes, look on your annual escrow statement to see the exact amount paid.

The Fine Print:

• You can’t deduct assessments (one-time charges for things like streets, sidewalks and sewer lines).
• Keep a record of the assessments you paid. When you sell your home, you can generally use the cost of those assessments to reduce any tax you owe on your sale profit.

Where You Claim it:
Schedule A

Where You Read About it:
Publication 530 Tax Information for Homeowners

 

5. Private Mortgage Insurance

Did you put down less than 20 percent when you bought your home? If you did, your lender probably forced you to buy private mortgage insurance. Those monthly premiums are tax deductible, if you can clear a few hurdles. (See The Fine Print below.)

If you have a Veterans Affairs, Federal Housing Administration or Rural Housing Service loan, you likely paid upfront mortgage insurance premiums at the closing table (they might have called it a guarantee fee). The deduction for those is pretty complicated.

You get to deduct a part of that upfront premium each year. To figure out how much to deduct, you first check to see which is shorter:

• The length of your mortgage
• 84 months (seven years)

If your mortgage lasts more than seven years, you divide the cost of that upfront mortgage premium by 84 months and then multiply by the number of months you paid it (so 12 months for a full year) to get your deductible amount.

If you mortgage lasts seven years or less, you divide by the number of months it lasts and multiply by the number of months you paid it.

The Fine Print:

• You have to have gotten your mortgage in 2007 or later.
• When adjusted gross income is more than $100,000 (married filing jointly) you start losing the private mortgage insurance deduction and it disappears completely when your adjusted gross income is more than $109,000.

Where You Claim it:
Schedule A

Where You Read About it:
Publication 530 Tax Information for Homeowners

 

What About Everything Else?

What about all the other home-related expenses you paid, but can’t deduct, like your new deck or the pipes you replaced? Hang on to those invoices and receipts by scanning them (receipts fade over time) and storing them in a file or online.

When you sell your home and you’re figuring out if you owe federal tax on the profits, you may be able to subtract the cost of the improvements you made from your home’s selling price.

Tax laws are complicated and the devil is in the details. This article contains general information, so it may, or may not, apply to your situation. A tax professional or tax software can tell you how the tax rules apply in your circumstances.