If you choose to buy a home, you'll be able to write off some of the cost of home ownership, like mortgage interest and property taxes. If you itemize deductions, you'll be able to write off even more. If all of your deductions add up to more than your standard deduction, you could save thousands of dollars in taxes.
What You're Giving Up
Most of the tax savings you'll receive when you buy your house come from itemizing deductions. Some deductions are specific to your house. Once you start itemizing for your house, you will be able to claim others. However, when you itemize, you're going to have to stop claiming your standard deduction. The standard deduction varies year to year and is based on your tax filing status. For the 2013 tax year, a single tax payer can claim $6,100, a head of household can claim $8,950 and a married couple filing jointly can claim $12,200.
Mortgage Interest Deduction
When you buy a house, the Internal Revenue Service lets you deduct the interest on up to $1.1 million of debt. You can deduct the interest on $1 million of home purchase debt, or what you spend to build, buy or improve your home. You can deduct the interest on another $100,000 of "home equity debt," which is money you can borrow against your house for any reason. Along with you interest, you may also be able to deduct any mortgage insurance premiums you pay on a low-down-payment loan.
All of your property taxes will be tax deductible. However, not everything that comes on a property tax bill is. If your community bills for recurring services like water or garbage through property tax bills, you'll have to break them out. The same applies to assessments for improvements, like if you are paying $150 a year toward the cost of building sidewalks in your neighborhood.
If you weren't itemizing deductions and buying a house turns you into an itemizer, you'll be able to write off additional deductions that have nothing to do with your house. For example, in addition to writing off property taxes, you can also write off personal property taxes, like a portion of your car or boat's registration that is tied to its value. The IRS also lets you deduct state and local income taxes or state and local sales taxes, but not both. Other write-offs include charitable contributions, medical expenses that are more than 10 percent of your adjusted gross income or money you spend on your job in excess of 2 percent of your AGI.
Consider a married couple who file for the $12,200 standard deduction. If they took out a 30-year loan of $150,000 at 4.25 percent interest, they'd pay about $7,900 in mortgage interest and about $1,900 for mortgage insurance each year if they chose an FHA loan. If their property taxes were $1,600, their total deductible expenses would be $11,400. This is less than the standard deduction. For itemizing to make sense, they would need to have other deductible expenses that aren't related to their house that would push them over the $12,200 they're writing off. If the couple had another $5,000 in deductions that didn't come from their house, they'd have a total deduction of $16,400. Since this is more than the $12,200 standard deduction, it makes sense for them to itemize. If they paid taxes in the 25 percent bracket, the extra $4,200 in write-offs would save them $1,050 a year in taxes.
- Goodshoot/Goodshoot/Getty Images
- What Are the Top 5 Things to Consider When Choosing a Bank?
- How Much Should Be Budgeted for a Newborn?
- How to Save Money on Gas Water Heaters
- Saving Money on Tax Returns
- How Much Money Can Be Saved From Using Solar Panels?
- How to Save $5,000 Dollars Yearly
- Can Deferred Compensation Be Rolled Into a 401(k)?
- Will Buying Solar Panels Really Save Money?
- How to Save Money on a Concrete Driveway
- How to Save Money When You Live Paycheck to Paycheck