It’s that wonderful time of year again--tax season! Ok, ok.. taxes remain a pain in the you-know-what, but for Morris or Sussex County new homeowners, there’s a silver lining in that cloud of paperwork: home ownership typically offers more deductions. Those deductions may then translate to a decrease in taxable income, meaning (cha-ching!) you could owe LESS in taxes!
The A Train
New homeowners typically stop using the 1040-EZ form and start itemizing deductions on Schedule A. Schedule A allows you to combine the thousands you’re newly paying in mortgage interest and property taxes with what you’re already paying in state and local income taxes. The result: you’re usually able to deduct MORE than the standard deduction.
- Loan costs and fees (sometimes labeled ‘application fee' or 'underwriting fee.') Also, if you paid points to get a lower interest rate, that's often deductible in the first year. Your lender might have called that 'buying down the rate' or 'discount fee' instead of 'points.'
- Mortgage interest. Most homeowners can deduct the interest portion of monthly mortgage payments -- not the principal -- each year. Exception: When your mortgage is close to being paid off, the interest is less than the principal. So even when combined with other deductions, you might not have enough to exceed the standard deduction.
- Property taxes. Property taxes are also deductible, but they can be tricky in the year you buy the home because both you and the sellers owned the property during that year. Sadly, you only get to deduct the property taxes you owed for the portion of the year you owned the home; the seller gets the rest of the deduction.
- Mortgage insurance. Private mortgage insurance, which many homeowners pay each month if they put down less than 20%, is deductible for many every year you pay it. (Other types of insurance, like homeowners insurance, aren't deductible unless you can claim a portion of the home insurance because you work at home exclusively.)
One Thing That’s Certain
First year doing your taxes as a Morris or Sussex County homeowner? We recommend working with an accountant, especially if your home doubles as your exclusive, regular place of business; or if your lender sold your mortgage to a different lender. You’ll learn from a pro, and can give it go on your own next year. There’ll always be more taxes to do!
Source: Dona DeZube, National Association of Realtors