You’ve heard it before: Your home is probably the biggest investment you’ll ever make. It’s also probably the biggest tax write-off you’ll ever have. Follow these tax tips for homeowners to ensure that you receive all of the tax deductions and tax credits to which you’re entitled for the 2009 tax year.
Home-related tax deductions, from mortgage interest to real estate taxes, can add up. If you’re married filing jointly with taxable income of $100,000, an extra $5,000 in deductions would lower your tax bill by $1,250. Tax credits, for such things as energy efficiency and homebuying, are even more valuable because they increase your refund (or decrease what you owe) dollar for dollar.
Give yourself a day to organize paperwork and fill out tax forms. Need help? IRS Publication 17, “Your Federal Income Tax,” has the answer to just about any question you can think of, and it’s free. Basic tax software starts at $29.95, and H&R Block charges $187, on average, to prepare a tax return. Full-service accountants charge more, depending on the complexity of a return.
Tax deductions for non-itemizing homeowners
The last thing taxpayers want to hear is that the IRS has come out with yet another form. But this time the news is good, especially for homeowners. The new Schedule L allows homeowners who don’t use Schedule A to itemize returns to deduct real estate taxes and certain disaster-related losses. Only about one-third of filers itemize, according to the IRS.
Non-itemizers are usually entitled to a standard deduction, which for 2009 is $11,400 for married couples filing jointly ($5,700 for singles). Schedule L allows homeowners to increase the standard deduction by as much as $1,000 ($500 for singles and married filing separately) to account for any state or local real estate taxes paid during the year.
Losses from federally declared disasters can also be added to the standard deduction. First, affected homeowners need to complete Form 4684 to determine the amount of the net disaster loss. Then, the amount of the loss needs to be reported on Schedule L to determine the new standard deduction. Only losses from official federally declared disasters, as opposed to ordinary casualty losses suffered during non-declared disasters, can be added to the standard deduction.
Generally, the interest you pay on the mortgage for your main home and a second home is tax deductible. To qualify for the mortgage interest deduction, the loan must be secured by a qualified home, and you must itemize your tax return. Even a house trailer or boat can count as a qualified home, as long as there are sleeping, cooking, and toilet facilities.
The interest you pay on second mortgages, home equity loans, and home equity lines of credit (HELOCs) can also be deducted. Generally, you can deduct the interest on up to $1 million—$500,000 if you’re married filing separately—in home loans used to buy, build, or improve a home. If a home loan was used for other purposes, such as buying a car or paying tuition, you can only deduct interest on the first $100,000 ($50,000 for married filing separately). Read IRS Publication 936.
“Points,” certain fees paid to a lender to obtain a home loan, might be deductible too. The general rule for points that you pay on refinanced loans is that those points aren’t deductible in full immediately, but are spread across the life of the new loan. In limited circumstances, if you pay the full amount of those points at the refinancing closing, you might be able to deduct the points in full immediately. The mortgage insurance premiums you pay on loans issued or refinanced after 2006 also can be deducted, though income limits apply.
Energy-efficiency tax credits
Home improvements made during 2009 aimed at lowering your energy bills could lower your tax bill as well. Uncle Sam is offering energy-efficiency tax credits equal to 30% of the cost of qualifying projects. Claim your residential energy tax credits on IRS Form 5695.
The tax credit for some energy-efficiency improvements, such as new windows and insulation, is capped at $1,500. More ambitious projects, such as solar panels and geothermal heat pumps, have no upper limit on the amount of the credit. Restrictions apply to both capped and uncapped credits—second homes may or may not qualify, and labor costs are excluded in some cases—so be sure to familiarize yourself with the energy tax credit rules.
Homebuyer tax credits
If you bought a home in 2009, you might be eligible for a homebuyer tax credit. First-time buyers who made a purchase between Jan. 1 and Nov. 6, 2009, can get a tax credit worth up to $8,000. Income restrictions apply. Purchases made after Nov. 6 are subject to more generous income limits as well as an $800,000 cap on home prices. A first-time buyer is defined as someone who didn’t own a home for three years prior to purchase.
The tax credit isn’t limited to first-time buyers. Longtime homeowners who’ve lived in their principal residences for five consecutive years out of the last eight can qualify too. This tax credit, worth up to $6,500, is good on home purchases made after Nov. 6. There are income and price restrictions.
Claim your homebuyer tax credits on IRS Form 5405. Because the IRS requires additional paperwork to verify the home purchase, you can’t file electronically. The homebuyer tax credits were extended into 2010. A signed contract needs to be in place by April 30, and settlement needs to occur before July 1. Credits earned in 2010 can be taken on 2009 or 2010 returns.
This article provides general information about tax laws and consequences, but is not intended to be relied upon by readers as tax or legal advice applicable to particular transactions or circumstances. Consult a tax professional for such advice; tax laws may vary by jurisdiction.