Did you become a first-time homeowner in 2010? If so, congratulations! I hope you are enjoying the comforts and satisfaction of owning your own place. You may know that by owning your home, you’ll also get some very favorable tax write-offs that can significantly increase your refund. So while filing your taxes will be a bit different this year, you’ll probably get a more favorable result. Here are some of the things you’ll need to consider.
Itemized Deductions on Schedule A
If this is your first time owning a home, then let me be the first to introduce you to Schedule A. Schedule A is the schedule used to report, among other things, taxes and interest you paid during the year on your new home. The reason you probably haven’t seen this form before is because without mortgage interest, most people don’t have enough tax deductions to itemize them. Thus, they end up going with the standard deduction, which is what taxpayers get when they don’t have enough deductions to exceed a certain amount. Itemizing is good because it helps reduce your income—thus a bigger refund. Having mortgage interest is usually the first thing that tips the scales for most filers into having to itemize deductions. In short, if you itemize, it means you are receiving more deductions, effectively saving you money on your taxes. On Schedule A, you need to ensure you include the following tax write-offs:
1. Real estate taxes you paid. If you pay these into escrow via your monthly mortgage payment, then you will see the amount to claim on Form 1098 that your lender sends you at the end of January. If you pay your own property taxes in one big payment, you claim them as a deduction in the year you pay them. So if they were paid in 2010, then claim them on your 2010 tax return.
2. Home mortgage interest and points you paid. Again, your lender mails a Form 1098 to you at the end of January that includes this information. As a new homeowner, be sure you include the points you may have paid on your new mortgage as a deduction. Points is the fee you paid at closing to “buy” your interest rate down. Since you are effectively pre-paying interest, the IRS allows you to consider this as a deduction.
Now that we covered the major homeownership deductions, let’s look at 2 credits that you might be entitled to take.
Home Energy Improvement Credits
If you made energy efficient improvements to your home during the year, you may qualify for certain tax credits. The form you need to complete is Form 5695. Energy efficient improvements include adding insulation, caulking windows, installing energy efficient windows, and replacing your furnace and water heater. These projects can save you up to $1500 on your tax bill. Plus, if you made improvements for geothermal heat pumps, small wind turbines, and solar energy systems, these are additional credits worth up to 30% of the cost of these items..
First-Time Homebuyer Credit
If this is your first home (or first new home in several years), you may qualify for the First-Time Homebuyer Credit. According to the IRS, “you must have bought — or entered into a binding contract to buy — a principal residence on or before April 30, 2010. If you entered into a binding contract by April 30, 2010, you must have closed (gone to settlement) on the home on or before Sept. 30, 2010.”
If you bought a house in 2010 and met those rules, then don’t miss out on this valuable credit worth up to $8000. To get this credit, complete Form 5405, and submit it along with your settlement statement to receive the credit.
Home ownership definitely has its rewards, especially when it comes to increasing your tax refund. But it’s not necessary to sweat the details. Tax software like TurboTax does all the hard work for you by identifying all these tax breaks, putting the numbers on the right form, and then computing just how big your refund will be. Visit our Q&A if you’re looking for information on how to replay the 2008 First-Time Homebuyer Credit.