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Each year, Americans overpay their taxes by an estimated $945 million dollars because they miss simple deductions. Some of the most commonly overlooked tax deductions are those that Uncle Sam provides homeowners. "Tax time is a gift for homeowners," says Bob Walters, Chief Economist at Loans. "When you add up all the deductions homeowners can take, you've essentially got Uncle Sam making a mortgage payment for you every year." Walters recommends every homeowner who has yet to file their taxes take one last look to ensure they did not omit these common deductions:
Mortgage Interest
"Mortgage interest is the most obvious deduction," says Walters, who says a primary residence qualifies unless: - The mortgage balance exceeds $1 million
- The mortgage was taken for reasons other than buying, building or improving the home
In addition, if you have a home equity loan, the interest you paid may also be tax-deductible, but the deductible amount is generally limited to the interest paid on your loan up to $100,000. Late Payment Charges or Prepayment Penalties
Some mortgages require you to pay a penalty if you pay the mortgage off early. The monies paid to the lender for prepaying are deductible.
"In some instances you may even be able to pay off a late-payment charge on your mortgage," advises Walters, who recommends homeowners consult with an accountant to make sure they qualify. Property (or Real Estate) Taxes
"These taxes are annual taxes based on the assessed value of your property," says Walters. This information can be found in a mortgage interest statement, which a lender will send to you at the beginning of each year. It may list the amount of real estate taxes you paid if your taxes and homeowners insurance were placed in an escrow account. "If real estate taxes aren't included on your mortgage interest statement, you can review your cancelled checks to determine the total real estate tax deduction."
Points Paid on a Mortgage
Homeowners can deduct points they paid on their mortgage if: - The loan is for their primary residence and it was used to buy, improve or build the home;
- Paying points (and the amount of points paid) is not an irregular practice in their geographic area;
- Points are computed as a percentage of the loan principal;
- Points are clearly outlined on the buyer's settlement statement; and
- Cash you put into your home purchase is at least equal to the points charged.
Additionally, if you refinanced in 2005, you may be able to write off some of the points you paid.
Walters explains: "Points are deducted proportionately over the life of the new loan. For example, on a 30-year loan, this year and each year thereafter, you can deduct 1/30th of the points paid. However, if you refinanced in 2001, for example, and paid points, you could have deducted 1/30th of those points in each of the 2001-2004 tax years." If you refinanced again in 2005, the remaining points from the 2001 refinance (points not yet deducted) can now be deducted in full since that loan has been paid off, according to Walters. "There are so many advantages to owning a home come tax time, but you need to do your research to find out which ones are relevant to your situation," says Walters, who also strongly advises that after researching potential deductions, homeowners consult with a reputable accountant or tax preparer to verify their eligibility before making claiming any deductions.
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