Homeowners can make use of key benefits to reduce taxes
NEW YORK – Mortgage interest is just the beginning.
Owning a home can provide some significant advantages when it’s time to file your federal tax return. From green energy credits to deductions for damage from natural disasters, there are a number of items homeowners may be able to claim that could reduce a tax bill.
Most homeowners know that they can deduct the interest paid on up to $1 million in mortgage debt for their primary home. The interest paid on up to $100,000 of a home equity loan for the same home may also be itemized.
In most cases, it’s possible to deduct all of your mortgage interest, so long as you itemize your deductions. That opens up opportunities for other savings.
For instance, local property taxes may also be itemized. Although property tax rates vary widely across the country, this item alone can be a big win for homeowners in areas with heavy tax burdens.
Here are some other tax benefits:
1. Refinancing costs. Homeowners who refinanced their mortgage in 2011, and paid points or a fee based on the loan amount, may qualify for a deduction. However, unlike points paid on a new mortgage, those paid on a refinancing must be written off over the life of the loan.
Each point is generally equal to 1 percent of the loan. Say for instance, you paid 2 points on a $150,000, 30-year loan, or $3,000. You may claim $100 of that fee each year you own the home.
2. Mortgage workouts and foreclosures. When a lender forgives debt, the amount forgiven is usually considered taxable income.
However, under a law passed in late 2007, taxpayers whose mortgage debt on their main residence was partly forgiven through a mortgage workout are generally able to exclude the forgiven debt from their income. The same goes for those who lost their homes through foreclosure and had some part of their debt written off because they owed more on the home than its market value. Taxpayers who lost money on a foreclosure generally may not claim a loss on their returns.
3. Energy-efficient home improvements. This will be the last year that homeowners may claim credits for installing energy-efficient exterior windows and doors, heat pumps, furnaces and insulation under a law that expired on Dec. 31. Up to 10 percent of the price of the improvements may be claimed. There is a lifetime limit of $500, of which only $200 may be used for windows.
Homeowners who installed alternative energy equipment may receive a credit of up to 30 percent of the cost for the installation. There is no cap on this credit. Anyone who replaced an old household appliance with a new energy-efficient unit may also be able to claim a small credit. The credits range from $25 to $225, and are based on the type of appliance and its energy efficiency.
4. Medical-related expenses. A taxpayer or dependent who has a medical condition that requires renovation to a home may be able to claim the cost of that work as a medical expense.
Medical expenses are only deductible to the extent they total more than 7.5 percent of adjusted gross income. But if you installed a ramp, widened doorways or did other work, such as lowering countertops to accommodate a wheelchair, it may be far easier to reach that threshold. Such work generally counts as a medical expense, and may be added to more traditional costs like doctor bills and prescriptions.
5. Disaster losses. There were 99 separate federal disaster declarations in 2011. The declarations made federal funding available to individuals and businesses, and enabled them to claim disaster-related losses. Typically the IRS requires that the first $500 in losses be deducted from any claims.
Homeowners may claim the losses on either the return filed during the year of the disaster – their 2010 return – or the following year.
Likewise, taxpayers who live in Washington, Oregon, Utah, Alaska, Alabama or Massachusetts – where federal disasters have already been declared in 2012 – may be able to claim losses on their 2011 return when they file this year.
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