If you own your own home in the United States, you may be entitled to some big tax savings. Tax deductions can be complicated, so here is a summary of how the homeowner tax deduction works and you to calculate your savings.
Homeowner Tax Deduction Rule #1: You Have to Own Your Home with a Mortgage
The homeowner mortgage interest deduction is one of the most popular tax deductions in the country. Anyone who owns a home with a mortgage may qualify, but there are some restrictions or situations where you would not take advantage.
Also keep in mind that this is a deduction, not a credit. A credit directly lowers your taxes (e.g. $1 in interest = $1 off your taxes). This is a deduction. $1 in interest lowers your taxable income and calculate your adjusted gross income (or AGI). This lowers the amount of taxable earnings you report to the IRS, and will typically lower your taxes by about 25% of every dollar you pay in mortgage interest.
Homeowner Tax Deduction Rule #2: You Have to Itemize Your Deductions
To use the homeowner mortgage tax deduction, you must itemize your deductions. When you file your taxes, you can choose between itemized deductions and the standard deduction. With the standard deduction, each member of your household gets an automatic deduction. With itemized deductions, you have to list out qualifying deductions and add them up for your tax return.
If you itemize, you will want a list of all qualifying deductions including non-profit donations, qualifying education and business expenses, and anything else that qualifies for your personal situation.
Homeowner Tax Deduction Rule #3: Itemized Deductions Must Be Larger Than Standard Deduction
In the last section I briefly mentioned the standard deduction. This part get get a little tricky.
Everyone gets a standard deduction from the IRS when filing taxes. The deduction lowers your taxes paid for you, your spouse, and any qualifying dependents. To find out if you will itemize or take the standard deduction, you have to calculate your deduction for both and take whatever is higher.
If your standard deduction is higher than your itemized deduction including your mortgage interest, you should take the standard deduction and skip the mortgage interest deduction.
Homeowner Tax Deduction Rule #4 Seek Professional Support If You Need It
Taxes are complicated, and doing them wrong can cost you big. Interest and penalties can add up to a massive expense down the road if you do something wrong. When in doubt, hire a tax professional to assist you.
Just like hiring a real estate agent to help you buy a home, hiring a certified public accountant to help you with your taxes can save you money in the long run.