You bought your first home this year. Even better, come tax day, owning a home can provide you with big financial rewards. That's because homeowners can claim several tax breaks that can shave thousands off your tax bill.
But they won't help you if you don't claim them. Here is a list of the most important tax breaks for homeowners. To claim these, you'll have to itemize your taxes using IRS Form 1014 and Schedule A. This means that you'll no longer be able to quickly fill out your income taxes with the 1040EZ form.
You'll find, though, that the extra work usually pays off with solid savings.
1. Mortgage Interest Deduction
When you first begin paying your mortgage, the bulk of your payments go toward interest, not the principal balance on your loan. The good news at tax time is that you can deduct the interest that you pay on your mortgage. These deductions can be sizable during your first years of owning a home.
There is a limit, though, on interest deductions. You can't claim mortgage interest payments if your home loan is more than $1 million, but fortunately, that's not something that most new owners will have to worry about.
Your lender will send you a Form 1098 each January. This form will list how much you paid in mortgage interest throughout the year. You then simply enter that number when filing your taxes.
2. Property Taxes
Depending on where you live, you might pay plenty in property taxes each year. Usually, you'll pay a portion of your yearly property taxes with each mortgage payment you make. You'll include extra dollars with your mortgage payment — in an amount determined by your lender — that your mortgage provider will then deposit in an escrow account. When your property taxes are due, your lender will pay them on your behalf from this account.
Fortunately, you can deduct your property taxes each year, too. If you have an escrow arrangement with your mortgage lender, the amount you pay in property taxes will also be listed in the Form 1098 that they will send you in January.
Did you pay your lender points to reduce your interest rate? If so, you might be able to deduct their cost, too.
Buyers spend 1% of their home loan to buy a single point. Lenders allow buyers to purchase points as a way to lower their interest rate. The goal for buyers is to spend a bit upfront for a lower interest rate that guarantees them lower monthly payments for the life of their loan.
If you did pay points, the amount you paid will again be listed in the Form 1098 that your lender sends to you.
4. Private Mortgage Insurance
Homeowners don't like paying for private mortgage insurance. This is no surprise. This insurance doesn't protect homeowners at all. Instead, it protects your mortgage lender in case you stop making your monthly payments.
But you can deduct your private mortgage insurance premiums on your taxes, thanks to the new Protecting Americans From Tax Hikes Act of 2015. This recent piece of legislation preserves the deduction for private mortgage insurance for the 2015 and 2016 tax years.
You'll have to pay for private mortgage insurance if the down payment you provided was less than 20% of your new home's purchase price. You can drop private mortgage insurance on conventional loans not insured by the federal government once your loan-to-value ratio hits 80%.