But with so many deductions it can be difficult to tackle without a checklist.
If you bought or sold a home this year, you have some extra opportunities, like dedications for recordation, pro-rated property taxes for buyers, and capital gains for sellers.
If you did not buy or sell this year, here’s a checklist of the tax issues most homeowners encounter on an annual basis.
1. Mortgage Interest Deduction
Everyone knows the interest you pay on your mortgage is deductible from your federal and state income taxes.
However, the longer you have paid your mortgage, the less valuable your interest deduction will be. Fixed rate mortgages are structured so that you pay more interest than principal at first. The ratio of interest to principal declines every year and your tax deduction decreases as well. Halfway through your term, you will be paying more principal than interest. Returning to higher mortgage interest deductions is an incentive for some owners to refinance, even though this extends the term of their mortgage.
Also be sure you include every form of mortgage interest you pay. Many owners don’t realize the mortgage interest deduction applies to any loan secured by your home in addition to your mortgage. That includes a second mortgage, a line of credit, or a home equity loan. It also applies to a second or vacation home as well as your primary residence.
Changes to tax law in 2013 are making the mortgage interest deduction, along with other deductions, less valuable to higher income taxpayers. For homeowners with an adjusted gross income above $300,000 for couples (and over $250,000 for single filers) the itemized deductions claimed by taxpayers gets reduced by three percent each year. The maximum reduction of itemized deductions is set at 80 percent.
Remember, you don’t need to calculate your deductible mortgage interest. Your lender will send you a copy of Form 1098 at the end of the year stating the amount of interest you paid. Save that form to file with your tax return. For more information, see the IRS.
2. Property Taxes
Property taxes paid to state and local governments can be deducted from your federal taxes in the year in which you paid them–so, for 2015. If you pay your property taxes by escrow through your mortgage lender, your lender will send you an annual statement, which you can file with your completed federal tax returns.
You will also receive a statement from your state and any local jurisdictions for property taxes you pay either directly or by escrow. Property taxes are usually paid twice a year. If you are missing statements for 2015, contact your state or local taxing authority to get a statement for your records. For more information, see here.
3. Mortgage Insurance
Since 2007, taxpayers have been able to the deduct the premium payments they may make on mortgage insurance—including the upfront premium that FHA borrowers pay—as long as they spread the cost of the upfront premium over the time the insurance coverage is in effect.
However, unless Congress acts before the end of 2015, taxpayers who paid mortgage insurance premiums in 2015 will not be able to deduct those payments from their federal income taxes as they have in the past.
Last year, Congress passed a one-year extension of the mortgage insurance deduction just two weeks before the end of the year. The National Association of Manufactures is mounting a similar last ditch effort to extend the mortgage insurance deduction for another year, but its fate is still unclear. The NAM-supported legislation extends about 50 tax provisions that were scheduled to expire in 2013 on a year-by-year basis, including mortgage forgiveness (see below) as well as mortgage insurance.
To learn whether or not you will be able to deduct premiums you paid for mortgage insurance in 2015, check with your member of Congress, your accountant or the IRS to determine whether Congress took action on this issue before it adjourned for the year.
4. Mortgage Forgiveness
Mortgage forgiveness occurs when your lender forgives some or all loan debt that you owe. This can occur when you have either modified your loan using a loan modification program or lost your home in a foreclosure. Up until 2007, the forgiven debt was taxed as income, adding to the distressed homeowner’s financial burden. But under the Mortgage Forgiveness Debt Relief Act of 2007, the forgiven debt has been rendered tax-free.
The law expired at the end of 2012 but has been extended since then. The extension expires at the end of this year, like the mortgage insurance deduction discussed above, and is part of the same package of extensions that are running out of time. If not extended, homeowners who had any of their mortgage principal forgiven by their lender will have pay taxes on the forgiven amount.
To find out whether or not you will be liable for mortgage debt that was forgiven in 2015, check with your member of Congress, your accountant, or the IRS to determine whether Congress took action on this issue before it adjourned for the year.
5. Home Improvements for the Disabled for Chronically Ill
Certain types of home improvement projects are tax-deductible. Home improvements made for medical reasons, for example, can be tax-deductible. If you are making home renovations to accommodate a chronically ill or disabled person, and the renovations do not add to the overall value of the home, the project costs are typically 100 percent deductible. Repairs and improvements made for aesthetic purposes are not. See page five of this guide for more info.
6. Losses from Casualties or Theft
You can deduct losses to your home from theft or casualties like earthquakes, fires, floods, storms, vandalism, sonic booms, terrorist attacks, and other catastrophes that were not fully covered by insurance. You can also deduct the cost of a home appraiser to value the damage. Be sure to back up the loss with documentation from your appraiser. See here for more information.
7. Home Improvements for Rented Space
If you rent out a portion of your home, you can depreciate a portion of home improvement costs. This enables you to depreciate the expense as a rental expense. This amount is deducted from the rental income you receive. See the IRS website for more information.
8. Home Improvement Tax Credits
You may also qualify for tax credits if you made certain improvements to your home to make it more energy efficient. For 2015 you can qualify for a tax credit worth 30 percent of the cost of alternative energy equipment installed on or in your home. Qualified equipment includes solar hot water heaters, solar electric equipment, wind turbines, and fuel cell property. See the IRS website for more information.
9. Home Office Deduction
If you use part of your home for business, you may be able to deduct expenses for the business use of your home, including a portion of your mortgage payments, a portion of all upkeep and maintenance costs, a portion of home improvements, and a portion of your utilities.
You must regularly use part of your home exclusively for conducting business. For example, if you use an extra room to run your business, you can take a home office deduction for that extra room. You must show that you use your home as your principal place of business. If you conduct business at a location outside of your home, but also use your home substantially and regularly to conduct business, you may qualify for a home office deduction.
For example, if you have in-person meetings with patients, clients, or customers in your home in the normal course of your business, even though you also carry on business at another location, you can deduct your expenses for the part of your home used exclusively and regularly for business. You can deduct expenses for a separate free-standing structure, such as a studio, garage, or barn, if you use it exclusively and regularly for your business. The structure does not have to be your principal place of business or the only place where you meet patients, clients, or customers.
Generally, deductions for a home office are based on the percentage of your home devoted to business use. So, if you use a whole room or part of a room for conducting your business, you need to figure out the percentage of your home devoted to your business activities. For more information, see here.
Source: Total Mortgage