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Homeownership can be rewarding in many ways. For starters, owning a home lets you build equity over time as opposed to renting, which leaves you with nothing to show for your years of payments. You also have more freedom to personalize and customize a home that you own.
Another benefit of owning your home is the tax advantages you're entitled to. Here are three tax deductions for homeowners that could mean thousands less in taxes.
Homeowners -- particularly owners of more expensive homes -- have a huge advantage on their taxes: They can deduct the interest paid on up to $1 million of principal on their mortgages. At current interest rates, that means a tax deduction as large as $45,000 in the first year on a $1 million mortgage.
Of course, you don't have to be a million-dollar homeowner to qualify -- 4.5% interest on a $100,000 mortgage will still get you a $4,500 deduction against your income. Anyone who has paid mortgage interest in the past year can deduct mortgage interest from his or her taxable income. And the impact on your year-end tax bill can be astounding. For those in a marginal tax bracket of 25%, it's like getting one-quarter of the interest you paid back from Uncle Sam.
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The mortgage insurance deduction technically expired at the end of 2013, but thanks to recent legislation, it has been extended for the 2014 tax year. Nobody enjoys paying mortgage insurance, and it can be expensive -- which means this tax break can be pretty lucrative.
In order to qualify for the mortgage insurance deduction, your contract must have been issued after 2006. The deduction is reduced for taxpayers with gross incomes above $100,000 ($50,000 for married taxpayers filing separately) and is eliminated completely for gross incomes higher than $109,000 ($54,500 if married filing separately).
And as with the extremely popular mortgage interest deduction, you can only deduct your mortgage insurance if you choose to itemize deductions. In fact, the IRS instructions tell you to treat mortgage insurance the same as mortgage interest.
This deduction can be worth quite a bit if you qualify. For example, if you have an FHA mortgage with an outstanding balance of $200,000, and you pay a mortgage insurance rate of 1.35% per year, that translates to an annual mortgage insurance premium of $2,700. If your marginal tax rate is 25%, this deduction can add $675 to your tax refund.
Mortgage-related costs are a big part of homeownership, but another deductible expense that doesn't get as much attention can be equally important. So long as you itemize your deductions, you're allowed to claim any amounts you pay in property taxes on your home as a tax write-off, reducing your taxable income dollar for dollar by whatever your tax liability is.
The rules for property-tax write-offs are even more generous than the mortgage interest deduction, as there's no limit to the amount of taxes eligible for the deduction. Further, you can deduct taxes not only on your primary residence, but also on second homes like vacation properties. In calculating the amount of the deduction, what matters is when you paid the tax, not the period for which the tax applies. Many people pay real-estate taxes through their mortgage companies, so you'll need to look at the tax form your lender supplies in order to find your deductible tax amount.
One trap for the unwary, though, is that, unlike mortgage interest, property taxes are not deductible for purposes of calculating the Alternative Minimum Tax. So if you fall under the umbrella of the AMT, amounts you pay for property tax might not reduce your overall tax liability. Still, most people get a considerable tax break from property taxes, adding to the value proposition that home ownership offers.
The article 3 Tax Deductions Homeowners Won't Want to Miss originally appeared on Fool.com.
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