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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 January 8, 2021

How To Pay Off Credit Card Debt Fast: 7 Powerful Tips

How To Pay Off Credit Card Debt Fast: 7 Powerful Tips

Ever wondered whether your credit card debt is the reason you’re in a bad financial situation? You can’t enjoy any fun activities because a good chunk of your money goes toward debt payment. Heck, you’re even behind on some of your monthly bills.

The effects of clumsy debt management are too many to list here. This guide is going to help you discover how to pay off credit card debt fast and start chasing your financial goals.

Debt problems are the last thing anyone wants to encounter. But things can get out of hand when all the “little debts” you take accumulate in interests.

What if you knew some simple and proven ways to be debt-free quickly? Implementing them would mean better financial health for you. It becomes possible to free up cash for your “wants.” These include taking a trip or buying something you’ve always desired. All that while paying your bills on time!

Let’s not wait any longer. Here are 7 powerful tips for paying off credit card debt fast:

1. Pay More Than the Minimum Credit Card Payments

Many people only pay the monthly minimum on their credit cards. Truly, that’s the right amount for staying on good terms with your credit card company. But you need a different approach if you’re looking to achieve financial independence within a short time.[1]

Most of your payments go toward interest costs when you only pay the minimum amount. A substantial sum of your balance remains standing. As a result, it becomes more expensive to eliminate your debts.

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You don’t want to wait more than 10 years to get rid of debt while it’s possible to do it sooner. All you have to do is double that $100 minimum payment to $200 or go higher.

The good thing is that minimum credit card payments are affordable in most cases. By paying a higher amount, you reduce your interest costs, lessen your borrowing period, and boost your credit score.

2. Start With High-Interest Credit Card Debt

If you have more than one credit card debt, prioritize putting the extra money toward the ones with the highest interests. This debt pay-off strategy, known as the debt avalanche method, is essential for being debt-free quickly.[2]

First, you need to list down all the credit card debts you have in the order of their interest rates. Next, you choose the one with the highest interest and pay a significant amount toward it each month. It can be an amount twice or even thrice larger than the minimum payment.

At the same time, you make monthly minimum payments on the other debts. Their interest charges won’t be as costly as that of the first debt on your list. You only move on to the next high-interest debt after the first one is gone. Remember that your focus is on the interest rates and not the balances.

3. Revisit Your Budget

Budgeting is useful for tracking your financial moves. Once you create a budget, some tweaks along the way can make it work for you better. One situation that requires you to revisit your budget is when you’re struggling with debts. It might hurt a bit to slash some expenses. But you also don’t want to miss out on achieving financial freedom in the long run.

You can reduce some variable expenses to free up more cash for credit card debt payments. They’re the ones that change from time to time. Some examples are groceries, fuel, and clothing.

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Other opportunities for cutting down your spending lie in non-essential expenses. Instead of dining out all the time, you can cook at home more to save money. You can also share some subscriptions with friends and pay a fraction of the cost.

If you’re determined enough, you can eliminate all your unnecessary expenses and focus on paying off your credit card debt first.

4. Avoid Using Your Credit Cards

Do you want to know how to pay off credit card debt with a low income? One simple way is to stop using them. Having your credit cards everywhere you go means that you’ll be more tempted to buy unnecessary stuff. In this case, you spend money that you don’t really own and get deeper into debt.

The quickest fix to stop the debt build-up is spending with cash. You’ll be more aware of everything you can afford at any particular time. If you decide to keep one or two cards to ease the transition, always make wise choices. For instance, only use them when experiencing financial difficulties.

It’s best to categorize your fun activities under “discretionary spending” in your budget. This way, you won’t need more debt to kill your boredom. By halting your credit debt from accumulating, it’s easy to pay down what you already owe and be happy with the progress.

5. Start a Side Hustle to Boost Your Income

You’re probably turning away a lot of money by not monetizing your skills. Everyone has something that they’re good at doing. And you can use that to generate extra income for attacking your credit card debt.

If you look around your neighborhood, you can find several side hustle opportunities. It can be pet sitting, tutoring, or lawn mowing. You can start an online business by offering services such as digital marketing, content creation, and web development. Such skills go in high demand on freelance sites and job boards.

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Finding clients on social media is also a good strategy to utilize your skills and make more money. Facebook groups, Quora Spaces, and subreddits are some places to look for side jobs. You only have to join a niche-specific platform, share your services, and respond to any opportunities.

It’s possible to learn a skill, practice it, and earn from it. Use the free resources online or purchase some e-courses to get started.

6. Sell Your Used Items for Extra Cash

Starting a side hustle isn’t the only way to generate extra money. You can turn unwanted items into cash for paying off credit card debt. Whether it’s an old TV, book, or furniture, there is always someone itching to buy your used stuff.

A garage sale, as much as it’s old-fashioned, is perfect for getting your neighbors and passers-by to buy from you. You keep all the money because there are no business permits or taxes involved. While you may not make much cash, it’s better than leaving your stuff to go defunct in your storage.

Other than that, you can sell your used stuff on online marketplaces. Facebook groups are great places to start if you want quick approvals and hence sales. You only have to ensure that your listing follows Facebook’s commerce policies.

When selling any pre-owned items online, ensure they’re in good shape to avoid problems with your buyers.

7. Know When to Seek Help With Your Debt

Asking for help with your credit card debt can be challenging to do. But letting it drown you is a road you don’t want to take. While you may feel embarrassed at first, it’s the best way to get back on track when you run out of options.

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There are tons of non-profit credit counseling organizations that can offer you free guidance on how to escape the debt trap. An example is The National Foundation for Credit Counseling. They simply review your finances and help you determine the source of your financial problems. After that, they match you with an actionable debt management solution.[3]

In extreme cases, the debt solution can be:

  • Debt relief – where your debt is partially or wholly forgiven
  • Debt consolidation – taking out one loan to repay others
  • Debt settlement – the creditor forgives a significant portion of your debt
  • Bankruptcy – legal process for seeking relief from some or all your debts

It’s necessary to carefully weigh your options before deciding on the way to go. Find out how it might affect your credit score and any other risks.

Wrapping It Up

Debt is a major setback when you’re trying to prosper in life. Paying off credit card debt is essential if you want to reach your financial goals. That means having more free income, a good credit card score, and even a chance to retire early. You become more productive each day because of the peace in your mind.

So, you now have some tips on how to pay off credit fast. Go ahead and get rid of that good life progress killer!

More Tips on How to Pay Off Debt

Featured photo credit: rupixen.com via unsplash.com

Reference

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