Minimize what you’ll owe the tax man and maximize what you’ll get back at tax time! Doesn’t that sound great?
People are always being strategic in minimizing what they owe and maximizing tax returns. But understanding if you’re eligible for tax breaks can be daunting. The tax code is 4 million words and more than 70,000 pages long.
To ensure you’re not missing out on any hefty tax breaks, consider these three common home–related tax breaks that are often missed, overlooked, and underused.
Mortgage interest tax break
The very best reason to own and not rent is this! The mortgage tax break!! Many homebuyers expressly call out the mortgage interest tax deduction as a major motivation behind their desire to own a home. The ability to write off interest on up to $1 million of mortgage debt shifts the affordability equation and makes buying more financially compelling than renting for thousands of homeowners every year.
According to the American Institute for Economics Research, only about 63% of homeowners itemize deductions — a prerequisite to taking the mortgage interest deduction and its cousin, the property tax deduction.
This isn’t always because owners are unaware of potential savings. There’s a number of people whose income tax liability is simply so low that itemizing their tax deductions doesn’t add up. Low tax liability means that some people’s holistic financial picture, including earned income and deducted mortgage interest, renders a larger standard deduction than the tax break they would receive by virtue of the mortgage interest and other itemized deductions.
However, many homeowners who are eligible for itemizing don’t fully appreciate what they stand to gain or simply don’t feel up to the task of determining whether they have sufficient non-mortgage-related deductions to itemize, so they do their own taxes and take the standard interest deduction to minimize the work.
If you have a high mortgage or property tax bill, it might be obvious that itemizing makes sense. But if not, you owe it to yourself — and your bank account — to at least try working with a tax preparer or committing to spend the time and energy it takes to explore the question of whether itemizing makes sense.
Even an extra thousand dollars or two in tax savings can make a huge difference to your savings and your financial future.
State and local tax breaks for green home improvements
While it’s easy to focus on federal income tax deductions, some state tax rates can reach as high as 15 percent of your annual income!
In the past year, homeowners have taken steps to improve their home’s energy efficiency for a variety of reasons, including cash savings on utility bills.
The good news: Many of those improvements are eligible for state, county, and/or city tax credits — or tax breaks. If you’ve installed dual-paned windows, insulation, low-flow plumbing appliances, tankless water heaters, or solar panels last year, dig up your receipts.
COD tax exemptions
Normally, defaulted mortgage debt that is forgiven through a foreclosure, short sale, deed in lieu of foreclosure, or settlement via partial payment is actually charged to a taxpayer as income. It’s called cancellation of debt, or COD.
Under the 2007 Mortgage Debt Forgiveness Relief Act, though, the IRS has temporarily exempted COD from incurring income tax liability for as many as 100,000 homeowners a year, to avoid penalizing homeowners for these sorts of settlements and resolutions to upside-down home mortgages.
The Act was initially set to expire in 2013, but was extended through 2016.
If you were able to close a short sale or settle a defaulted home loan in 2016, chances are good that you are eligible to take advantage of the COD tax break when you file your 2016 return