Your Mortgage, And Your Taxes

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One of the best reasons for buying a house is the tax situation it puts you in. Let's face it: when you rent, your money goes to your landlord. When you're paying off your mortgage loan, some of it comes back to you!

Here's how it works: if your home mortgage loan is less than one million dollars, then the interest on that home mortgage loan is tax deductible.

How can you tell how much interest you paid? Just as you receive notification at the beginning of the year of various other tax information for the past year, your mortgage lender will send you a form you can use in preparing your own taxes or to send on to your accountant. The form is called "Mortgage Interest Deduction" (form 1098) and you should receive it in January, just in time for tax preparation.

The mortgage lender will send the same information to the IRS, along with notification of any property taxes paid that year by the mortgage company on your property.

This means, of course, that if in the past you used the 1040EZ form to file your taxes, those days are over. But it's well worth it!

Schedule A of form 1040 is the document you'll use to itemize your home and mortgage-related deductions. Note that there are some requirements that the IRS makes in order for you to receive these deductions. Aside from the requirement to use Schedule A, you also must be able to show that you are legally liable for the mortgage loan (in other words, you can't help your parents, your children, o your Aunt Edna with their mortgage payments and then deduct that interest from your tax liabilities), and you have to have taken out the mortgage loan on a home (as opposed to other kinds of properties, although the definition of "home" is somewhat comprehensive, requiring only that sleeping, cooking, and toilet facilities be present).

When you're thinking about tax credits for home ownership, it's worth adding that it's not just the mortgage that can give you some tax relief: making improvements on your home can help, as well, whether you finance them through a new mortgage (refinancing) or through a home equity line of credit. Energy efficiency has traditionally been an improvement likely to garner approval from the IRS, and while the benefits are not as great as they used to be, it's worth looking into. The Nonbusiness Energy Property Credit allows you to deduct ten percent of what you paid for certain specific energy-efficiency improvements (including insulation, windows, some heating and cooling systems minus the cost of installation).

No matter how you look at it, your tax situation will improve when you're paying for your own house rather than helping someone else pay for theirs. Another great reason to consider home ownership today!