As much as it saddens me to admit it, we’re entering yet another tax season. When you weren’t a homeowner, your taxes were probably pretty simple — you filed a 1040EZ with your single W-2, waited for your return to arrive as if by magic, and went on with your life. Once you’ve purchased a home, just like once you’ve had a child or gotten married, life changes in the blink of an eye.
Just because you aren’t a bright-eyed naive renter any longer doesn’t mean that tax time has to be painful. I put together an easy to understand guide for your tax filing this year. If you’ve not yet purchased your home, keep all this stuff in mind for next year. Even though the law changes year to year, it’s rare that there’s a huge modification to the tax law when it comes to the average homeowner.
To Itemize or Not to Itemize, That’s the Question
You’re not alone if you’re struggling with the decision to itemize this year. After all, there’s a lot at stake. In my own home, we go back and forth on this topic, but because my husband and I live in a low value area and have one of those lovely 4 percent interest mortgages, we really don’t usually have enough deductions to make it worthwhile.
However, plenty of you live in areas where homes are considerably more expensive than they are in the Missouri Ozarks. For you, it may make sense to itemize. The first year you own a home, it’s a good idea to figure your taxes both ways (I know this is incredibly tedious) and if you get a better credit itemizing than you would if you were to take the standard deduction, plan to itemize each year. You should still do your taxes with and without itemizing for the first few years, but if it’s a clear-cut advantage to itemize, then do so with gusto!
Hey, taxes might not be the height of entertainment, but we’ve got to do them, so they might as well be saving us money.
Breaking Down the Schedule A
You’re going to take those itemized deductions and stick them on a Schedule A, whether you’ve got a lot or just a few. I thought it might be helpful for you if I went ahead and picked out the lines that are most likely to be of interest to you. Here they are:
Line 6. Real Estate Taxes. The amount of money you actually paid the tax collector for your real estate taxes in 2014 goes on this line. It can get a little tricky if you’ve got an escrow on your mortgage, but you’ll easily be able to see how much tax your servicer paid on your behalf on your escrow accounting report. If you can’t find this, call your mortgage servicer for help. Any real estate tax credits you received in 2014 should be subtracted from the amount of tax you paid before entering it on this line.
Line 10. Home Mortgage Interest and Points Reported to You on Form 1098. Provided your home’s mortgage is under $1 million dollars, you can deduct all the mortgage interest and points reported to you on this line. Points are a bit sticky — most of the time, homeowners deduct them over the lifetime of the loan, but there are some cases where you can deduct them upfront. Generally, you’ll have had to pay the points out of pocket, instead of including them in seller paid closing costs, though.
Line 11. Home Mortgage Interest Not Reported to You on Form 1098. In some cases, you’ll pay mortgage interest and not get a form in the mail. This is common when you’ve asked for seller financing — they simply may not know they need to send this form to you. In that case, you can deduct your home’s mortgage interest with the same limitations as on Line 10. If only part of your mortgage interest was included on form 1098, you’ll need to consult with a tax pro to see what has caused your mortgage insurance to exceed the threshold if your home’s mortgage is below $1 million dollars.
Line 12. Points Not Reported to You on Form 1098. If you paid discount points to reduce your interest rate at the time you secured your home’s initial mortgage, you can generally deduct them across the life of the loan. If you paid origination points to cover a lender’s service, you can’t deduct those at all. Do not put the origination points as a challenge to the IRS’s fact-sniffing hounds.
Line 13. Mortgage Insurance Premiums. You can deduct your mortgage insurance premiums provided that you paid them during 2014 and your adjusted gross income was less than $100,000 for a couple or $50,000 for a single person (or married filing jointly). If you got your loan through the VA or USDA, the funding fee and guarantee fees may also be deductible, provided the insurance contract was issued in 2014. If you didn’t buy your home last year, don’t worry — these rules apply to any home purchased after December 21, 2006.
Line 20. Casualty or Theft Losses. We don’t really hear about this one much, but if your home is damaged during a storm, fire or other act of nature, your property is vandalized or your valuables stolen, you may qualify for an additional tax break. There are some strict qualifiers, though. Your part of each reported loss had to be more than $100 and the total amount of loss (minus the $100 minimum per incident) must be more than 10 percent of your adjusted gross income. You’ll need to file Form 4684 along with your taxes to claim this credit.
Don’t Forget These Related Forms!
Once you’ve finished your Schedule A, there are a couple other forms you may want to visit, just in case. Even though they won’t be useful for everyone, depending on your circumstances, you may find extra places to save tax dollars with the following forms:
Form 3903 (Moving Expenses). Although Form 3903 isn’t directly related to owning a home, many of you will buy homes in far away locations because of your work. When you’re relocated, the expenses aren’t all on you — many can be deducted from your taxes. There are a few rules though:
- You have to move to the new location within a year of starting a new job there.
- The new house has to be closer to the new job than your old house would have been (in miles, not in commute time).
- Your new job must be fifty miles further from your old job than your old home was from the old job — so if your old house was three miles from your job, your new job has to be at least 53 miles from your old job.
- You must be employed full time.
If you meet the qualifications, you may be able to deduct the cost of shipping your household goods, including both furniture and pets, and your car; connection and disconnection fees for utilities; any related storage fees, as well as travel costs for you and your family. Even if your employer offers some kind of moving reimbursement, you may still be eligible for a moving credit depending on your circumstances.
Form 4684 (Casualties and Thefts). Those of us at US Mortgage Calculator sincerely hope you never have to file Form 4684, but if you ever experience a major loss to theft or natural disaster, it’s good to know it’s there. We discussed it some in the narrative on Line 20 of the Schedule A, but it’s worth repeating in this section.
Damage or loss from theft, fires, floods, cave-ins, storms and vandalism are obvious reasons to use this form. You can also use it if your home is suffering significant damage from corrosive drywall, as defined by the Consumer Product Safety Commission and the Department of Housing and Urban Development.
Form 5695 (Residential Energy Credits). Green houses are great places to find deductions for Form 5695. Solar, wind and geothermal systems may garner credits, as will Energy Star rated updates to your home. New roofing with specific reflective pigments, Energy Star doors, windows and insulation will also gain you deductions that can add up quickly. The best thing about Form 5695 is that you’re literally getting tax credits for home improvements that will save you lots of money in the long run. Keep your receipts from Home Depot and Lowe’s, because they’re going to pay dividends come tax time.
The Bottom Line: Taxes are Painful and Tedious, But at Least They’re Just Once a Year
No one likes filing their taxes, especially when they’ve become more complicated, but if you’re a homeowner it’s a good idea to pay attention to the tax forms and lines I’ve highlighted here. Skipping just one may cost you thousands of dollars in credits. No matter if you’re making green improvements or paying lots of PMI and interest, it makes sense to go through the tax forms line by line and figure out if itemizing is best for your situation each and every year. Doing your taxes isn’t the most fun way to spend your off time, but at least they come around only once a year.