Buying a house can be one of the biggest financial milestones you’ll achieve.
That’s because your home is a major purchase. Which is why there’s a good chance you’ll take out a mortgage loan to complete the transaction.
Although a mortgage can be costly over time, there are ways to reduce the impact it has on your overall budget.
Here are five different ways your can take advantage of tax deductions and credits related to your mortgage.
1. Mortgage interest tax deduction
If you are buying your home with a mortgage, you might be eligible for tax deductions based on the expenses associated with owning a home.
And the mortgage interest tax deduction is definitely the biggest one.
However, you can only take this deduction if you itemize your deductions on your tax form. This means you need to fill out the Schedule A form.
Generally, it only makes sense to itemize if your total on Schedule A is more than the standard deduction open to everyone. So make sure you run the numbers to see if itemizing makes sense for you.
In fact, this handy Bankrate mortgage tax deduction calculator shows how much you could save in income taxes when you itemize a mortgage interest tax deduction, as well as your mortgage points (more on that in a bit).
Here are the types of loans that “count” if you want to deduct the interest you pay:
- The mortgage used to buy your home
- A mortgage on a second home
- Home equity line of credit
- A home equity loan
Remember, though, that you can only deduct the interest you pay. You don’t get to deduct the entire amount of your monthly payments.
And, you can only deduct what’s listed above if you are the primary borrower. Or, if you have cosigned the mortgage.
Additionally, once the total amount of your mortgages reaches $1 million (or $500,000 when you’re filing separately), the amount you can claim as a deduction becomes limited.
2. Deducting mortgage points on your taxes
The amount you pay in points can also be deducted from your income. Essentially, one point is equal to one percent of the loan principal.
Most homebuyers choose to pay for points in order to reduce the overall interest rate of the mortgage. It can mean big savings in the long-run if you plan to stay in the home.
You can also deduct the points paid on a mortgage refinance. So make sure to do the math to see if it makes sense to pay points in your situation.
3. Property tax deduction
When you buy a home, you can expect to pay property taxes in many states. These taxes might also be listed as “real estate” taxes.
In any case, the amount you pay is entered on Schedule A. So you will need to itemize in order to take advantage of this deduction.
The property tax deduction can be used for property taxes paid on your primary residence, vacation homes, land, and even foreign property.
But, you can’t claim a deduction for other taxes paid related to your home. These include taxes collected for utility use and trash collection.
Essentially, if it’s not directly dealing with your property’s value, it can’t be part of the real estate tax deduction. You can, however, deduct school taxes if the formula used is based on your property’s value.
Also, make sure you pay attention to how the property taxes are taken care of. For instance, if you pay them as part of your mortgage payment, it only matters after you’ve actually made the payment. Not when the money goes into escrow.
4. PMI tax deduction
If you had to get private mortgage insurance (PMI) because of your small down payment, you might be able to deduct your premiums.
There are income phaseouts for this tax deduction, though. So once you reach a certain threshold you won’t qualify for this tax deduction.
5. Mortgage tax credit
So far, we’ve only looked at tax deductions associated with buying your home. However, it’s also possible for you to get a mortgage tax credit if you qualify.
Normally, a tax deduction is all about reducing your income. With less income, your tax bill will be lower.
On the other hand, a tax credit is like taking a gift card and applying it to what you owe. It’s great because it represents a dollar-for-dollar reduction in the taxes you owe.
However, the mortgage tax credit is only available to low-income, first-time homebuyers. You’ll need to apply for a mortgage credit certificate through your state or local government to qualify.
Is a mortgage tax deduction worth it?
At the end of the day, it never hurts to run the numbers and compare the possibilities.
And the great thing about the mortgage tax deduction and property tax deduction is that they are both part of the overall amount shown on Schedule A.
What’s more, you don’t need your home-related tax deductions to amount to more than the standard deduction on their own. They’ll also be added to your medical and dental expenses, charitable contributions, and other deductions.
Remember, when you’re checking out the math, make sure your mortgage interest tax deduction is part of everything you will list on Schedule A.
Although most people wouldn’t get a mortgage just for the tax deduction, if you’re buying a house anyway it makes sense to see if itemizing any of the above will work in your favor.