If you’re in the business of buying a new home, it’s safe to assume that all of the numbers, papers, legalities, and technicalities are a lot to take in. From understanding all of the little things and big decisions that come with a new home, there are some fairly big things that can work to your advantage in the form of taxes.
Fortunately, the United States Tax Code gives homeowners rather significant breaks for the things you likely are already paying for in your mortgage and escrow. Naturally, depending on your chosen filing method, these breaks may or may not be significant enough to result in appreciable savings, but nevertheless, it’s important that you know about the tax benefits available to you. Let’s take a look at some of the most popular ones.
1. Interest Deductions
In most cases, and especially early in homeownership, your mortgage interest deductions will result in the biggest tax break you and your family will get on your mortgage. Since the majority of your monthly payment goes towards interest (at least in the early years), there are significant advantages to deducting the interest you pay on your mortgage when it comes time to file taxes.
In fact, all of the interest you pay towards your mortgage is deductible. and could yield a significant financial windfall every April.
2. Property Taxes
Regardless of where you live, you’ll owe property taxes to either your city or local municipality or possibly your county if you live outside of city limits. Whatever the case, all of your property taxes are deductible from your income tax. If you’re new to having a mortgage, you may have not even noticed the monthly property tax you pay in escrow.
For simplicity, and to keep you in compliance with your lender, you likely pay one-twelfth of your annual property taxes each month and your lender will pay the taxes on your behalf from an escrow account. In addition, you may have paid for some of your taxes upfront during closing in order to get your escrow account where it needs to be for the remainder of the year.
No matter how you “paid” into your property tax pool, it’s all deductible!
3. Discount Points
Discount points are a way of buying down your interest rate by paying extra to your lender at closing. While not all lenders or loans offer the ability to pay for discount points, if you did pay for them, you can deduct them from your taxes as long as the amount paid is deemed an “acceptable amount”.
Again, not every lender or loan will allow you to pay discount points, so you may or may not have the option for that deduction. In most cases, you can deduct the amount paid for the year in which they were paid. In some cases, such as refinances, you may need to calculate the discount points over the life of the loan.
4. Home Office Deductions
Home office deductions may very well be one of the biggest non-interest, non-tax deductions a homeowner can take. When it comes to filing taxes, you can either itemize the total amount of money your home office costs you during the year or take a standard home-office deduction based on what percentage of your home’s square footage your office takes.
Remember, though, home offices must be dedicated spaces used for business or work purposes exclusively. Don’t think that you can use your bedroom as a home office if you occasionally take a Skype or Zoom call for work!
Have questions about mortgage interest, taxes, or escrow? Get in touch with one of Tidewater Mortgage Services’ Loan Officers today to find out more about getting pre-qualified for a loan.
