Did You Track Your Purchase Costs?
If you haven't already checked it out, make sure to read through our article about what numbers to track when you are in the process of purchasing your home. Even if you bought a few years ago, have a look at this article to make sure you've got this info recorded somewhere so you'll have it when you need it:
- Check out "Numbers to Track When Buying a Home"
Start Tracking Two Non-Home-Related Things
As a homeowner, there's a higher chance you'll end up itemizing instead of using the standard deduction on the personal side of your taxes. Check out our article "What is the difference between “taking the standard deduction” and “itemizing”?" to get an explanation of what that means.
In practical terms, here are some things you should start keeping track of going forward:
- Out-of-pocket healthcare costs that weren't reimbursed (things like preventative care, surgeries, therapy sessions, dental work, glass or contacts, etc—more info what to track here)
- Charitable donations to non-profits (both monetary and non-monetary—make sure to get receipts for any non-monetary gifts valued at $500 or more)
You'll also be tracking your mortgage interest and property taxes, but we'll get into that below.
A portion of every mortgage payment you make goes toward paying interest on the loan. You're able to deduct the interest you pay up to a limit, which just depends on when you took out the mortgage:
- Dec. 16, 2017, and later: You can deduct the interest on up to $750,000 of mortgage debt (or up to $375,000 if you're married and filing separately).
- Oct. 14, 1987, through Dec. 15, 2017: You can deduct the interest on up to $1 million of mortgage debt ($500,000 if married and filing separately).
- If you refinanced a mortgage, the limit depends on the old loan's origination date. If the mortgage predates Oct. 14, 1987, all the mortgage interest may be deductible.
Your mortgage servicer will send you an annual statement showing how much interest you paid each year (Form 1098). If you have more than one mortgage and/or refinanced, you may get more than one mortgage interest statement. Just upload all of them for your tax appointment and we'll add it up.
Be sure the 1098 includes any interest you paid from the date you closed on your home to the end of that month. If it doesn’t, this amount should be listed on your settlement sheet for the home purchase. You can deduct it even if the lender does not include it on the 1098.
Note for Co-Op Owners
Remember to check for mortgage interest and property taxes on any co-op year-end maintenance statements. In addition to having your own mortgage you're also part of the building's mortgage. Sometimes the year-end statement will give you the exact amount that you paid, and sometimes it will just tell you how much you paid for each “share” in the co-op you own, in which case we'll just need to know how many shares you own.
You can deduct up to $10,000 ($5,000 if married and filing separately) of property taxes in combination with state and local income taxes or sales taxes.
The amount you paid in property taxes will also be listed on form 1098 (if you paid the taxes through an escrow account), if not check your financial records. Also, be advised, in the first year you own your home, you probably reimbursed the seller for real estate taxes they prepaid for the time you actually owned the home, so make sure to count that as well.
FYI: You can't deduct payments into your escrow account as real estate taxes. Your deposits are simply money put aside to cover future tax payments. You can deduct only the actual real estate tax amounts paid out of the account each year.
Some people pay "points " to their mortgage lender in order to get a better interest rate. It's essentially an upfront fee to lower the interest rate of the mortgage. This charge usually shows up as a percentage of the total loan. If the loan is secured by your home and the amount of points you pay is typical for your area, then the points are deductible as interest as long as the cash you paid at closing via your down payment is equal to the points. The deductible amount should be shown on your 1098 form.
This can get a little confusing, so here's an example: if you paid two points (2%) on a $300,000 mortgage (2% = $6,000), then you can deduct the points as long as you paid that $6,000 using your own cash. Note: You can deduct the points even if you asked the seller to pay them for you as part of your final deal.
Loans or Lines of Credit
Interest on home equity loans and home equity lines of credit can be deducted, but only if you spent the borrowed money on home improvements. (See our article on Home Improvements.)
Your home equity loan or HELOC debt counts toward the total mortgage debt limit for deducting interest. So if your first mortgage is over the deductible limit, then the home equity loan interest won't be deductible.
Buyers who make a down payment of less than 20% of a home's cost usually get stuck paying for mortgage insurance, which is an extra fee that protects the lender if the borrower fails to repay the loan.
The cost of mortgage insurance is currently deductible, but that may go away in the future (they keep shifting it every year). This deduction includes the amount paid for private mortgage insurance for conventional loans and mortgage insurance for FHA loans. It also includes the guarantee fee for USDA home loans and the VA funding fee for VA mortgages.
To claim this tax deduction for the 2021 tax year, the mortgage insurance contract must have been issued after 2006, and your adjusted gross income must be less than $109,000, or $54,500 if married filing separately. The amount you can deduct may be reduced if your adjusted gross income is more than $100,000 ($50,000 if married filing separately).
You can also take an appropriate percentage of your mortgage insurance as part of your home office expense, or against rental income. (See our article on Home Offices and Rentals for Homeowners.)
Soooo, this is all a lot. But we can help you sort through it if you need help or have some questions. Just reach out to firstname.lastname@example.org for a consultation.