For a first time homeowner, tax time can be a little nerve wracking. Having a mortgage affects your tax return and may make the difference between itemizing deductions and not.
One of the big things is the mortgage interest deduction, which is now the only deduction you can claim on your mortgage. Here are some things to think about.
To establish the correct amount you can deduct, you need to understand what counts as mortgage interest. Obviously the actual interest on your mortgage counts, including secondary mortgage, but it also includes:
Home equity loans must be secured in order to qualify.
Unfortunately, there are some things generally rolled into your mortgage payment that do not count as mortgage interest for the deduction. This means you can't just claim your entire payment as a deduction but will need to itemize it and do some math. The following don't count:
Again, this means that you can't just take your payment and deduct it. Your lender will help you understand what can and cannot be deducted.
To make your life easier, your lender is obliged to provide a Form 1098, which will give the amount of interest paid. You can then put this in Schedule A of your 1040 (unless it's a rental property, which is reported on Schedule E).
At this point you should do some math; while for many, even most homeowners, the mortgage interest deduction makes it worth itemizing deductions, for some it doesn't. Recent changes to the tax schedule have made it less effective to itemize for many.
You also need to make sure that your mortgage meets the required criteria to qualify. Specifically, it has to be your primary residence (second and vacation homes get a smaller deduction), and it has to be a secured debt. This means that you have signed a deed of trust, mortgage, or land contract. Wraparound mortgages do not count.
There is also a ceiling on the amount of your mortgage, which can come in surprisingly quickly in high cost of living areas. Currently, it is $750,000, which includes any second homes. This means you will only get the deduction on the interest on the first $750,000. Also, if you have a home office, then you have to split the deduction; the part of your home used for the business goes on your Schedule C. (At this point you absolutely need a tax professional to get it right).
All of this is very complex and it has also changed and is likely to change again. For example, the $750,000 limit was previously $1 million and may go back up, changing whether it's useful to itemize deductions for many people.
New homeowners in particular should employ a tax professional to help them determine whether they should take itemized deductions and get the amount of their mortgage interest deduction right. A good tax adviser will help make sure that you get the best "deal" by taking the right deductions for you. Your lender can also give advice and assistance.
To find out more about becoming a first homeowner, including tax implications, and to discuss preapproval for a mortgage, contact Lend Smart Mortgage today.
We are a direct lender and a broker who will work one on one with you to exceed your expectations. If we don’t have a product that makes the most sense for you, we’ll find the lender that does. We’ll make sure you have the best loan at the best price. Choose Lend Smart- it’s the smarter way of doing business.