What to expect from your new home
When you buy your first new home, there is great expectation of a new income tax deduction. This expectation exists for both single people and married couples as they enter the new world of itemized deductions. We no longer have to fill out the short income tax forms, we must now use the federal form “Schedule A” to get the tax benefits that others have promised. What awaits the first time home buyer? What Income Tax Benefits Are There Really And How Can A First Time Home Buyer Get Them? This is what we came to discuss and we will not rest until a firm understanding of home buying is achieved for the first time.
Step one: the agreement
Before moving to a new residence, the early settlement date must arrive. Are there any income tax deductions on the settlement sheet? There certainly could be. If points are paid to obtain financing, these points are deductible from income tax and include the points paid by the seller. There must be enough money paid by the borrower at the time of settlement to cover the amount of points paid in order to obtain a current deduction for income tax. When the points paid by the seller are taken as a tax deduction, the basis of the cost of the home must be reduced by the points paid by the seller. For example, if a new home is purchased for $ 400,000 and the seller pays a point or $ 4,000, the buyer can deduct this amount, but it will reduce the cost basis of the home to $ 396,000. The point deduction in the settlement year is exclusive to the purchase of a primary residence. Any other real estate purchase would require the amortization of points at expense over the life of the loan.
Real estate taxes paid at the time of settlement are also deductible. This is the amount on page one of the settlement sheet that refunds the taxes paid by the seller before leaving the property. Taxes placed in escrow (generally shown on page two of the settlement sheet) are not currently deductible as settlement expenses, but will be deductible when disbursed by escrow. The remaining items on the settlement sheet are currently not deductible and must be capitalized as cost of residence.
The time of year in which the establishment of a new residence occurs can have a significant impact on the availability of income tax deductions. For example, suppose a married couple moves into a new house in December. Because this is their first home, they have not itemized the deductions, but instead have been using the standard deduction of $ 10,300 (2006 standard deduction for married couples filing jointly). They won’t make their first mortgage payment until January of next year. Because of this, deductible settlement costs are likely to have little or no value to happy homeowners. They would have been better off postponing the settlement until January and entering a year where they would have twelve mortgage payments, property taxes, and could take full advantage of deductible settlement costs. Plan your transaction accordingly.
Going forward
Looking ahead, a first-time homeowner can expect to deduct mortgage interest expenses from their income taxes. This is true as long as your original acquisition debt does not exceed $ 1 million. Real property taxes will also be deductible as long as the homeowner (s) are not on the alternative minimum tax. Assuming the alternative minimum tax doesn’t apply, the first-time home buyer can expect to get tax deductions for both mortgage interest and real estate taxes paid during the year. It’s even possible to get the tax benefits of home ownership right away by changing your withholding deductions.
Suppose a single taxpayer will have $ 20,000 in mortgage interest deductions and $ 4,000 in real estate taxes. Because this taxpayer’s standard deduction of $ 5,150 is built into the withholding tables, we know that you can take an additional $ 18,150 in deductions ($ 24,000 less the standard deduction of $ 5,150). To obtain the tax benefit today, the taxpayer would file a new form W-4 (withholding exemptions form) at the payroll department where he works. This taxpayer would be eligible to claim 5 additional exemptions ($ 18,150 divided by $ 3,300 which is the personal exemption allowance) that would serve to increase the net salary during the next few weeks.
This process works similarly for married couples, except that the standard deduction used to determine additional deductions is $ 10,300. I must mention this precaution. If both husband and wife work, each has a standard deduction built into their respective withholding tables. In this case, the amount used to calculate excess deductions is $ 20,600. Don’t forget that other deductions that make up itemized deductions include state income taxes withheld or paid, charitable contributions, casualty and theft losses, medical expenses that exceed adjusted gross income limits, and miscellaneous deductions (usually from employee business expenses. not refunded). Remember, if a taxpayer is on the alternate minimum tax, there will be no benefit for income and real estate taxes paid and there will be no benefit for miscellaneous itemized deductions. This is supposed to be a simple overview of what a new owner can expect in terms of income tax benefits. Unfortunately, nothing is really simple.
