Get the Most Out of Your First Home Purchase: Claim These Tax Breaks
If you’re in the market to buy your first home, you’ll want to make sure you don’t miss out on any valuable tax breaks or credits that can lower your overall housing cost and put more money in your pocket. One of the most common tax breaks available to first-time homebuyers is the mortgage interest deduction, which allows homeowners to reduce their taxable income by up to $1 million by claiming interest payments made toward their primary home. In order to qualify, however, you must meet several criteria related to your annual income, loan amount, and loan type.
- Ways to buy without cash
Another great tax break that homebuyers are eligible for is a $500 tax credit which applies to most types of homes. Depending on your region, you may also be eligible for state and local property tax breaks as well.
Credits for energy-efficient home improvements
- Recapture that cost. The federal government and many states offer tax credits for buying qualifying green-certified homes (or making upgrades to your existing home). For a federal tax credit, you’ll have to purchase an ENERGY STAR® certified home in order to take advantage of this tax break. On average, these costs can be recouped within two or three years.
- Break on real estate taxes
There are some special tax breaks you can get as a first-time homebuyer, but they don’t all apply to everyone. For example, if you’re buying a condo or co-op, you won’t be eligible for these exemptions. Check out these five tax breaks that can save you money on your first home purchase.
1) The $10,000 New Housing Exclusion allows qualified buyers to exclude up to $10,000 from income taxes when purchasing a new house.
- Tax credits for first-time buyers
The Tax Credit for Qualified Energy-Efficient Home Improvements and The Credit for Child and Dependent Care Expenses are two credits for which first-time homebuyers can be eligible. If you purchase a qualified energy-efficient home, you may qualify for up to $500 worth of tax credits. There is also an income limit that varies on your filing status, but it ranges from $60,000 to $200,000 or less.
Deductions from interest payments and mortgage insurance premiums
One way that first-time homebuyers can get some extra money at tax time is by deducting the interest payments and mortgage insurance premiums on their federal income taxes. Interest payments are deductible from income, but only up to $100,000 in total. Mortgage insurance premiums may be deducted as an itemized deduction, so a taxpayer will need to keep all of their mortgage related paperwork for reference. One other tax-related expense that can help you save is making energy-efficient improvements to your home.
- The extra deduction for a bigger home loan balance
The IRS offers homebuyers a tax break when they take out a loan with a higher balance. This can be combined with other first-time homebuyer tax breaks, like paying off your student loans or putting more money into your IRA, to save you even more.
Don’t miss out on tax breaks for education expenses
Education is expensive, and you can use your student loans to deduct up to $2,500 for qualifying educational expenses on your tax return. To be eligible, you have to have qualified expenses that equal or exceed the deduction amount. The deduction can’t be more than $4,000 if you’re married filing jointly or qualified as head of household. This allows you to make saving money from student loans easier by allowing you to lower what’s owed in taxes.
- Rent and deduct it
If you’re a first-time homebuyer, be sure to take advantage of all the tax breaks you’re eligible for. There are deductions and credits available to help make your first home purchase as affordable as possible.
- Deducting points and origination fees at closing costs
While you are making interest-only payments for 30 years, any points and origination fees you pay to a lender can be deducted from your taxable income. According to Forbes, up to $6,000 in points and up to 4% of the home’s purchase price in origination fees are eligible for deduction. So if you’re taking out a $300,000 mortgage on a $500,000 home with 3% fees and 2% points, you’ll deduct a total of $1,510.
Use your credit card smartly, even on personal purchases.
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