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Home ownership is a big step that comes with many changes and new responsibilities. While there is nothing better than having a home, some adjustments need to be made in order to manage your new home properly. Perhaps the biggest change is you are now paying a monthly payment to a mortgage company rather than a landlord. By doing so, you are building up long-term equity in the home, and opening yourself up to some new tax advantages.
Change in Filing Form: If you have been a renter for an extended period, you have probably become accustomed to filing the 1040-EZ form at tax time. This is a very simple form for taxpayers that do not have many complications in their return and are just taking the standard deduction. When you are a homeowner, you will almost certainly want to switch to itemized deductions, which will require you to move to the 1040 long form with a Schedule A for your itemized deductions. However, do not let this change scare you. It will most likely work out significantly to your advantage.
Home Mortgage Interest: The largest deduction available to homeowners is the interest on the home mortgage payments. This can add up to thousands of dollars, especially in the early years of owning your home. This deduction alone will in many cases eclipse your standard household deduction and make it more than worthwhile to itemize.
It should also be noted than when you purchase a home (or when you refinanced your mortgage); you may have paid points in order to reduce your interest rate. If so, these points may also be deductible. There are some specific requirements to qualify for this deduction, and they vary depending on where you live. Check with your accountant to see if you qualify to deduct points paid on the purchase or refinance of your home.
Property Taxes: Another major deduction available to homeowners is property tax. Though property taxes will not usually be as large as your home mortgage interest, it is still a significant amount of money. Nationwide, the average homeowner can expect to pay somewhere in the neighborhood of $3000 annually for property taxes.
Private Mortgage Insurance: If you are one of the roughly 30% of homeowners that is required to pay private mortgage insurance or insurance through an FHA or VA loan, the good news is as of 2013, these premiums are once again tax deductible. Certain restrictions may apply to qualify, so as always, consult with your tax professional to find out if you can claim this deduction.
Indirect Tax Benefits of Home Ownership: Aside from what you can deduct as a direct result of owning your home, there are other itemized deductions that you can now take that would not have otherwise been worthwhile. For example, if you were a renter and had given $2500 during the year to charity, this amount may not have been enough to make itemization worthwhile. Now that you are deducting home mortgage interest and property taxes, charitable contributions and other itemized deductions can now be claimed as well, further reducing your overall tax burden.
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