Tax Deductions for Homeowners

Buying a home is a tremendous financial commitment. To ease the financial strain of homeownership, the Federal government has installed important tax deductions. As a resident, your mortgage interest and property tax expenses are deductible. As an investor, all costs that go toward the general maintenance and upkeep of your property may be tax deductible. Work to familiarize yourself with the correct tax paperwork, so that you may take full advantage of these homeowner’s deductions.

Economic Stimulus

Homeowner’s tax deductions reduce housing costs and work to improve real estate demand. Beyond the real estate market, these tax deductions allow Americans to keep money in their pockets to purchase consumer goods and make investments. These activities stimulate the economy and translate into jobs creation.

Form 1098

At tax season, you should receive Internal Revenue Service Form 1098 from your mortgage lender. Form 1098 is a statement that documents your mortgage interest and property tax payments made over the prior year. Your bank will also submit Form 1098 directly to the IRS.  People that make direct property tax payments to their local treasury, rather than mortgage escrow, should review their bank statements to verify property tax expenses.

For your investment properties, you should record the costs of maintaining these homes throughout the year. Applicable costs include advertising, management fees and utilities. Be advised that the IRS says that home improvements that add value to the investment are not tax deductible.

Schedule A and Itemized Deductions

Complete IRS Schedule A to itemize mortgage interest and property tax expenses for your residential real estate. The Schedule A form calculates your total itemized deductions, which are also listed as unreimbursed employee expenses, gifts to charity, and state income taxes. From here, you will enter your total itemized deductions on IRS Form 1040, and calculate taxable income.

Real estate investors that operate as sole proprietors, partners, or S Corporations, will complete Schedule E, to calculate their rental income. Schedule E information is also attached to the 1040, as it contributes to personal taxable income. Lastly, regular corporations file Form 1120 to include real estate expenses within business income.

Tax Deductions vs. Tax Credits

IRS tax deductions are not tax credits. Tax credits immediately lower your tax bill on a dollar-for-dollar basis. Tax deductions, however, merely decrease your taxable income. From there, taxable income is taxed at different tax brackets. United States tax law is progressive, where the wealthiest individuals pay the highest amounts in taxes.

Standard and Itemized Deductions

You may opt to either take the standard or itemized deductions when filing personal income taxes. Verify that itemized deductions exceed your associated standard deductions, before you write off mortgage interest and property taxes. For the 2013 tax year IRS standard deductions are $6,100 and $12,200 for single and married filing jointly couples, respectively.