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Top Tax Breaks for Homeowners

Top Tax Breaks for Homeowners

If you own a home or are thinking of buying one, you’ve probably heard about tax breaks for homeowners.

Buying a home is typically the largest investment that everyday, ordinary folks make in their lifetime. A little planning goes a long way toward ensuring that you get the most value from homeownership. One way to create value is to reduce expenses – and tax deductions can help cut into your overhead.

When it comes to tax deductions, there are various benefits instituted by the government, aimed at encouraging more people to own homes. You can take advantage of these tax advantages by comparing your standard and itemized tax deductions and settling on the scenario with the highest tax benefits. Here are some itemizations that can help you make that determination.

Mortgage Interest

The deductions on mortgage interest are among the biggest tax benefits you can get on your home. Mortgage interest refers to any interest paid on a debt secured by the primary residence or second home. (Deductions are not applicable for interest paid on a personal loan, just home loans). Interest deductions can be taken up to $1 million of the loan used to acquire or improve the home.

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At the beginning of each year, your lender should provide you with Form 1098, detailing the total amount of interest you paid in the previous year. Check the settlement sheet to ensure that Form 1098 includes the interest you paid from when you closed on the home, to the last day of that month.

Mortgage Insurance Premiums (MIP)

Mortgage insurance premiums refer to extra fees paid to protect the lender should a borrower default on a home loan. These premiums are paid by buyers who make a down payment of less than twenty percent of the loan amount. Mortgage insurance premium deductions can be made on home mortgages issued from 2007 onward.

According to the IRS, if the adjusted gross income as indicated on Form 1040 is more than a hundred thousand dollars or fifty thousand dollars if you are married and filing separately, the amount of deductible mortgage insurance is reduced. The statement on the mortgage insurance premiums is available in Form 1098.

Mortgage Points

Mortgage points are fees paid directly to the lender/broker at closing in exchange for a lower interest rate. Points are deductible as interest if the loan is secured by the home and the amount you deposited at the closing as down payment is equal to the points.

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It does not matter whether you or the seller paid the points; you are entitled to the deductions as long as you meet the minimum requirements. You will be able to deduct your points in the same year you pay them if you itemize them on Schedule A of IRS Form 1040.

Home Improvement Expenses

If you have made home improvements, keep the receipts and other documents safely. Those expenses become tax breaks when you decide to sell your home. Current, the law allows you to add all the home improvement expenses on the purchase price of your home thus reducing the capital gains taxable amount.

IRA Payouts

As a first-time home buyer, you can take advantage of the IRA penalty-free withdrawal for your down payment. IRA rules allow you to withdraw up to $10,000 to help build or acquire a home for yourself or loved ones. The money must, however, be used to build or buy a first home within 120 days from the time it’s withdrawn. You can be considered a first-time buyer as long as you have not owned a home in the last three years.

However, even though not penalized, the IRA withdrawals are subject to federal and state tax. It is therefore not advisable to tap into this account unless there is no other option. Alternatively, you can withdraw your contribution to a ROTH IRA account, which is usually penalty free and tax free. The best thing about a ROTH is that after five years, you can withdraw up to $10,000 of earnings for first home purchase without incurring any taxes or penalties.

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Tax-Free Profit From Sale

Another tax break for homeowners is in the capital gains; a single person can sell a home for a profit of $250,000 and not pay a dime in taxes. Likewise, a married couple can sell a home and make a profit of $500,000 and still not pay anything in taxes. However, some conditions apply.

First, the home on sale must be your principal residence, and you must have lived in it for two of the five years before you sell it.

Energy Credits

You can earn an additional tax break on your primary residence through energy-saving home improvement practices. For instance, you can get credit for up to ten percent of the cost of installing things like insulation systems, qualifying central air conditioners, energy-efficient heat pumps, furnaces, water boilers and water heaters.

The credit can extend up to thirty percent of the cost for more expensive energy-efficient equipment.

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Home Equity Loans (HELs)

When your home appreciates in value, you can use the equity as security to borrow more money. Like a regular mortgage interest, the interest of home equity loans is tax deductible. Federal tax law permits mortgage interest deductions on up to $100,000 in home equity loan.

Adjust Your Withholding

The best place to check whether you are overpaying or underpaying your taxes is the W-4 form you filed with your employer. If you are always finding out that you have underpaid your taxes, check whether you are getting the mortgage interest and other deductions as required.

There are numerous ways you can genuinely claim deductions on your taxes. For instance, you can claim a deduction if you have a side job, a side business or you do some freelancing. Ensure you adjust your W-4 withholding by following the instructions on the IRS website.

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Published on September 17, 2018

How Being Smart With Your Money Leads to Financial Success

How Being Smart With Your Money Leads to Financial Success

Achieving financial success is not something that just happens. Maybe if you win the lottery or something, but for the average person like you or me, it comes from a series of small steps you take over a long period of time.

With each step, you form a new smart money habit. And with each smart money habit, you build towards financial independence.

So what sort of habits can you form to get on that path? Let’s take a look at smart money habits you can start today to get you closer to a financially independent future.

1. Avoid being “penny wise but pound foolish”

It’s tempting to try saving a couple cents here and there when buying small items. However, that’s not where the real money is saved. You’re putting in extra effort for something that doesn’t move the needle.

You get the most bang when you’re able to cut down on your bigger bills. For example, finding a lower interest rate for your mortgage could save you $50+ per month. And cutting your transportation bill by purchasing a cheaper car or taking public transportation can provide large gains as well.

So, look at your recurring expenses such as housing, transportation, and insurance, and see where there’s wiggle room. It’s a much better use of your time than trying to pinch pennies here and there on smaller purchases.

2. When you want something big, wait

Impulsivity can get you in trouble in most aspects of life. Finances are no different.

It’s human nature to see something and want it right then and there. It starts as a kid in the checkout line at the grocery store, and it continues on through adulthood.

We get an idea in our head of something we want, and it’s hard not to go out and get it right then.

A good example is wanting a new car. Perhaps you’ve had your car for several years. It’s crossed the 100k mile mark. Maybe maintenance is due, and you’re annoyed that you need to replace the timing belt or purchase new tires.

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So, you get the itch.

You start digging around online, and you realize you could trade in your current car for something newer and more exciting… all for a few hundred bucks a month. Then you get obsessed.

Here’s where you have to take a step back.

Your newfound obsession is clouding your judgement. Rather than giving into the impulse, wait it out.

Set a timeframe for yourself. Maybe you come back to the decision three months down the road. See if the obsession lasts.

It might, but often, a funny thing happens. Often, you forget about it. And often, you find that the new car wasn’t a need at all.

The impulse faded. And you just saved yourself a ton of money.

3. Live smaller than you can afford

You finally get that big raise. And you want to celebrate – and why not?

You’ve been looking forward to this forever. And after all, it was all due to your hard work.

That’s fine, splurge a little. However, make it a one-time deal and be done.

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Don’t get caught in the trap that just because you’re now making more money, you should spend more.

Too often, people get more money and feel like they that gives them the means to buy a bigger house, a bigger car… you know the drill. Resist.

The fact is that living smaller than what you can afford is one of the fastest ways to build savings.

But if you constantly upgrade as you begin to make more, then you’ll never get ahead. You’ll just build up more debt along the way and have just as little wiggle room as before.

4. Practice smart grocery shopping

Food… it’s one of the biggest portions of any budget. And if you’re not careful, it can be one of the biggest drains on your wallet.

But luckily, there are a few things you can do to ensure that you stay smart with your money when buying groceries.

Create a grocery budget

Set a strict weekly grocery budget. When you know how much you can spend on groceries, you can then plan your weekly menu around it.

Once you know what all you need, you can go shopping and keep a running tally as you shop to ensure you’re on track.

I tend to do this in my head, rounding for each item. However, writing it down as you go would probably work best for most people.

Make a list… and never deviate

Never go to the grocery store without a list. If you go to the store with a ballpark idea in mind, you don’t have a true ide of what you need.

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You’re not well-researched. You don’t know what the sales are. As a result, you’re going to make decisions on the fly.

These impulse decisions will lead to overspending, which will derail your grocery budget.

Eat before going grocery shopping

It’s also important to eat prior to going to the grocery store. Hunger is a powerful force.

If you’re shopping on an empty stomach, everything is going to look good. In particular, you may find a lot of ready-made, processed snacks will look enticing.

After all, you’re hungry now and that food is easily available. So subconsciously, you may lean towards those items.

Unfortunately, not only are those items typically less healthy, but they’re likely more expensive. You pay for convenience.

However, when you eat prior to shopping, then you’ll shop with a clear mind. Your hunger won’t cloud your judgement, influencing you to make poor decisions like a cartoon devil resting on your shoulder whispering in your ear.

This makes it much easier to stick to your grocery plan.

5. Cancel your gym membership

Now that you’re all set on your food, it’s time to get smart about managing your budget in terms of physical fitness. And let’s begin by avoiding the gym. The gym bill, that is.

The average gym membership costs around $60 per month. That’s $720 a year.

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Yet, two out of three gym memberships go unused. That means two-thirds of people who have a gym membership are literally giving away almost a thousand bucks a year. It’s crazy!

I recommend seeking an alternative. One good alternative is to look into fitness streaming services.

Streaming services allow you to stream hundreds of workouts like Insanity and p90x, right in your own home for around $10-20 a month. That’s $40-50 less a month than the average gym membership.

Of course, then there’s the free option. The internet is full of free workouts that you can do on your own with minimal or no equipment.

For example, there’s the Couch to 5K program, that I personally used a decade ago to ease myself from couch potato to running my first 5K race. If I could do it, anyone could.

Then there are free resources like reddit that have limitless information on workouts. The Fitness subreddit has done all the research for you, populating workout tips and detailed workout routines for anyone to use in their wiki.

There are several routines that require no equipment. And you can join in on the subreddit to become part of the community, making it easier for those seeking comraderie and encouragement in their fitness goals. All for free.

It’s baby steps… And baby steps can start now!

I’ve never met anyone that can’t stand to be a bit smarter with their money. And on the flip side, anyone can get smarter with their money. But remember, it doesn’t happen all at once.

Begin by fighting your impulses. Prepare for the week and be smart at the store. And cut monthly expenses like gym memberships that are overpriced and you probably aren’t getting your money’s worth out of anyway.

The devil is in the details. And the details can change your lifestyle and prep you for a financially independent future.

Featured photo credit: Unsplash via unsplash.com

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