There are many perks to owning your own home including some great tax deductions for home buyers? For one thing, you can do almost anything with it you want – paint it any color you choose, decorate it the way you want, and tear down walls and add rooms. If you’ve rented for a long time, that makes owning pretty attractive. But there are also financial benefits to owning your own home. And the chief of these is the tax breaks – the tax deductions (though doing your taxes each year gets more complicated). So here’s a rundown of the tax deductions for home buyers in Cherokee County.
Tax Deductions vs. Tax Credits
Before diving into tax deductions for homebuyers in Cherokee County, we need to make a distinction between tax deductions and tax credits.
A tax deduction reduces your adjusted gross income – that income amount that determines how much income tax you have to pay – which reduces your “tax liability.” So, to illustrate tax deductions for homebuyers, if “you’re in the 24% tax bracket, your tax liability will be reduced by 24% of the total claimed deduction. So if you claim a $2,000 deduction you can expect your tax liability to drop by about $400.”
A tax credit, on the other hand, is simply money removed from your tax bill, working much like a coupon. A tax credit of, say, $300 means that the tax you owe goes down by $300.
Types of Tax Deductions for Home Buyers in Cherokee County
The most common and most favorable tax deductions for homebuyers in Cherokee County are as follows:
Homeowners (except in rare cases) are allowed to deduct all of their home mortgage interest. There is a $750,000 cap, but that will apply to very few people. And sometimes, you can even deduct late fees, which makes this one of the advantageous tax deductions for homebuyers.
After the end of the tax year in January, your lender will send you the IRS Form 1098 that shows how much mortgage interest you paid during the previous year. You will use this to calculate your deduction.
You can also claim interest paid as part of the closing transaction. You can get this information from the settlement sheet. If you’re not sure what that is, contact an agent at 770-280-4560 to find out.
Another of the major tax deductions, especially in a high-tax area, for Cherokee County homebuyers is the deduction for property taxes. “If you pay your taxes through a lender escrow account, you’ll find the amount on your 1098 form.If you pay directly to your municipality, you will have personal records in the form of a check or automatic transfer.”
And don’t forget that you can include any prepaid property taxes you reimbursed the seller for. Again, you can find this on the settlement sheet.
You may have paid points to your lender, and these can be used as one of the tax deductions for homebuyers. “Points are normally priced as a percentage of the total loan. If you paid$275,000 for your home, each point costs you 1% of your home, or$2,750. As long as you actually gave the lender money for these points, you get a deduction.”
PRIVATE MORTGAGE INSURANCE (PMI)
As a new home buyer (that is, taking out a mortgage in 2007 or later) who paid less than 20% down, you may be able to deduct your payments for private mortgage insurance. “Lenders charge PMI to borrowers who put down less than 20%.If you’re single and your adjusted gross income is less than $50,000, you’re eligible for the deduction. Above $50,000, the deduction phases out. If you’re married, the threshold is $100,000.”
Is It Worth the Trouble?
Remember that we said taking these tax deductions for home buyers means that you’ll have to itemize on your tax return. And that can turn into a huge task and a big headache. So you need to determine, before putting in all that effort, whether the deductions will exceed the standard deduction.
“Although tax deductions for homeowners can add up to thousands of dollars, claiming them is worth the trouble only if all your itemized deductions exceed the IRS standard deduction, which is much larger since the Tax Cuts and Jobs Act of 2017 took effect. . . . The standard deduction for the 2019 tax year is $24,400 for married couples filing jointly, $12,200 for single and married individuals filing separately, and $18,350 for unmarried heads of households.”
Can Your Agent Help?
There are indeed significant benefits to buying a home, not least of which are the tax benefits. Be aware, though, that these aren’t all the deductions you can take, and the home and its area can impact the deductions. And then you don’t want to buy more home than you can really afford just to get a greater deduction on interest. Paying off your home as soon as possible is almost always the better course.
A good agent (while not a financial adviser), can guide you through your purchasing decisions and the tax implications. To find out more about tax deductions for homebuyers in Cherokee County, contact us at 770-280-4560.