For New Homeowners
So you just bought your first home. Now you get to take all those great deductions people have been talking about.
Right? Well, sort of. First, you need to remember that the tax benefits of home ownership are all deductions, not credits. That means that the maximum benefit is limited by your tax bracket. If you're in a 15% tax bracket, your mortgage is cannot lower your taxes by more than 15% of the interest amount.
So, with that caution in mind, let's take a look at what you can now claim. Unless you belong to a church that requires tithing, this will probably be your introduction to itemized deductions, so I'll go over the whole form for you.
- Medical Expenses. If you have health insurance, you generally won't get any benefit from this section, because you have to subtract 7.5% of your income before you can claim any deduction. If you're self-employed and buy your own insurance, most of the cost will go on the front of the 1040, so it won't end up here. If you're not self-employed, though, and your employer does not have health benefits, you do get to claim your insurance cost, plus the cost of the copays, plus the cost of any necessary procedures not covered by your insurance, like contact lenses or dental care.
- State Income or Sales Taxes. Yes, your state taxes are a deduction, but if you overwithhold state income taxes to get a tax benefit, the refund will be taxable the following year.
- Personal Property Taxes. In California, this means your car registration, or at least the VLF portion. The exact amount is shown on your renewal form, with the helpful note "This amount may be a tax deduction."
- Real Estate Taxes. These are the property taxes you're paying on your new home. If you're paying into an escrow account, the mortgage company should tell you how much of your money they paid in property tax. It may be on form 1098. There may also be an initial payment made in the purchase documents of the house, and if it was payed directly to the county taxing authority, it will also be deductible.
- Mortgage Interest. This is the big one. Should come right off your forms 1098. You may have two or three, even if you only have one mortgage, because mortgages are sometimes sold from one bank to another. If you bought your house from an individual, you may not get a form 1098. Instead, you'll want your amortization statement, and the name, address and Social Security number of the seller.
- Points. If you paid points (if you think you didn't, check your closing papers for "loan origination fees" and "yield spread premiums") on your home purchase, those are deductible, too, in the year you purchased the home. They should be shown on your form 1098, too. Points on a refinance are not deductible in the year of the refinance, but are amortized over the life of the loan.
- Mortgage Insurance Premiums. If you have to pay them, they're deductible too. This is a relatively new law, which may not last, but it's valid for 2009, at least.
- Investment Interest. If you buy stocks on margin, or otherwise borrow money to invest, it is generally deductible to the amount of your investment income.
- Charitable Contributions. If you give cash to any church or 501(c)(3) charity, it's going to be deductible. Keep the "thank you" letter; it serves as your receipt. If your church doesn't give those out, write checks and get copies of the cancelled checks back from the bank. If you give stuff to Goodwill, take pictures to prove that the stuff is worth what you're claiming. If you're audited, you'll need those.
- Casualty Losses. The rules are complex, but if you have losses from a fire, theft, or other disaster, let's talk about it. You may be able to get some relief here.
- Employee Expenses. Most people don't get much benefit from this section, but if you have to buy your own uniforms or safety equipment, or if you have to drive your own car (without reimbursement) for the benefit of your employer, this is where you get to claim some of this back.
- Tax Preparation Fees. If you had your taxes professionally done last year, you get to claim a deduction for that, too. Often I will split this up, putting the applicable portion on the Sch C or E, as needed.
- Gambling Losses. Losses can only be claimed up to the amount you won, so keep all your receipts. If you have a "player's club" card, many casinos will give you a summary statement at the end of the year.
- Other stuff. There are a few more minor items you might be able to claim: safe deposit box fees, clerical help, losses from deposits in a nonfederally insured bank, costs of accommodating your workplace to your disability, and convenience fees for paying your taxes online.
Note that none of the above are directly connected to your home ownership, but it's unusual for non-homeowners to get any benefit from them.
That's not all you need to know, but that's a good start, and from there you'll know what questions you need to ask.