When you buy your first new home, you may qualify for tax credits that reduce what you owe on April 15th. The Obama-era tax credit has expired, but there are still opportunities to save money on your taxes.
Expired First Time Buyers Tax Credit
The first-time buyers tax credit was approved during the 2008 financial crisis. It offered a tax credit the year following the purchase of a buyer’s first property. This credit isn’t available anymore but there are other mortgage programs that yield tax breaks for first-time buyers.
Tax Benefits You Can Still Claim
Tax incentives exist on the local and state levels. One of the best places to find out the latest on these programs is the Department of Housing and Urban Development (HUD). Their website features grant and loan options available for home buyers.
Your lender will likely honor these programs and can even assist you in understanding the application requirements.
Visiting your lender or contacting them online often gets you professional advice about the best programs available for your family. Check out FHA, Freddie Mac, and Fannie Mae loans that may come with tax benefits.
What Can You Deduct After Buying a Home?
The biggest tax deduction is for mortgage interest paid. Under the Trump Tax Plan, you can claim this deduction for homes worth up to $750,000 (previously $1,000,000).
- Mortgage interest describes the interest you pay on your home loan. The fee is included for most mortgages that use the home itself as collateral for the loan. Mortgage interest is usually an adjustable rate, a fixed rate, or a combination.
On a fixed-rate mortgage, the interest is paid at a set percentage for the duration of the loan. For adjustable-rate mortgages, the interest rate fluctuates, depending on movement in the market, and the amount of interest paid can vary monthly.
Finally, the combination, or hybrid, mortgage has an initial fixed rate, but the rates can fluctuate after the initial timeframe.
- Property taxes can also be deducted on your federal taxes. This tax credit works like this: You deduct property taxes for the year in which they’re paid. If you buy a house during the year, you can claim the taxes paid from the closing date onward. However, a $10,000 limit applies for local and state property taxes.
- Your mortgage insurance premium is deducted as mortgage interest on Schedule A of form 1040
Before you commit to a big loan payment, it’s helpful to understand the impact on your taxes. It’s important to identify your financial situation to make sure you can take full advantage of any tax credits or deductions associated with home ownership.
If you don’t think you can swing a 20% down payment, remember that you can work with a lender to understand all your options. Factor in the likelihood of savings on your taxes before making a final decision on your first home purchase.