Homeowners, particularly new homeowners who will be filing their first taxes after purchasing a home, need to make sure they take the time to understand the types of deductions and tax benefits of mortgages that are available to them.
Standard Deductions and Itemized Deductions
In 2017, the Tax Cuts and Jobs Act was passed. One of the changes this brought was an increase in the standard deduction available for taxpayers. Before the passage of this act, the standard deduction was $6,300 for a single filer and $12,600 for a married couple that filed jointly. However, this has increased substantially. Today, it’s possible for single heads of households to deduct $18,880 and married couples who file jointly to deduct $25,100 with standard deductions.
This is a massive increase, and for many people, it means that taking the standard deduction is more beneficial than taking itemized deductions. However, it’s essential to remember that everyone’s situation is different. In some cases, it may be more helpful to take itemized deductions.
Mortgage Interest Tax Deductions
Mortgage interest tax deductions will let homeowners deduct the interest they are paying on their mortgage each year from their federal and state income taxes. Because mortgages will typically have interest payments front-loaded, this deduction can be a significantly beneficial for those who are new homeowners. “Front-loaded” means that around 75% of the monthly payment is going toward the mortgage interest during the first year of the loan, so being able to deduct this amount can offer substantial savings.
It is important to note that in Pennsylvania, mortgage interest is NOT tax deductible on state tax returns, but it can be deducted from your federal tax returns.
Also, remember that it’s possible to deduct mortgage interest on more than just your primary home. If you have land, a vacation home, or other properties, you should be able to remove the interest on those as well.
There are some limitations to this deduction, however. For debt secured after December 15, 2017, the limit is $750,000 for married filing jointly and $375,000 for married filing separately.
Mortgage Insurance Tax Deductions
Many homebuyers are required to have private mortgage insurance. This is especially true when someone has a low down payment mortgage. The insurance is there to help protect the lender. However, these fees are often tax-deductible. Those who have adjusted gross incomes of less than $109,000 when filing jointly or $54,500 when filing separately can take these deductions. If you make more than this amount, you will not qualify.
Property Tax Deductions
Property tax deductions are another tax benefit of mortgages. Those who are new homeowners can deduct the property taxes that are paid at closing. You can also deduct transfer fees, real estate taxes paid by the lender, loan origination fees, and recordation fees. This can help to reduce the overall amount of taxes paid significantly.
SALT Caps
The state and local taxes (SALT) deduction will often help determine whether a homeowner should itemize or file with standard deductions. In 2017, a cap for SALT was instituted at $10,000, meaning this is the highest amount that can be deducted from federal tax returns. Those who live in states with high tax rates often find that their taxes are reduced from what they were previously. Many states have not been happy with the legislation and are seeking to repeal it.
Understanding the potential tax advantages that you now have as a homeowner can be complicated. If you aren’t entirely sure which options are suitable for you, you should consult with a reputable financial expert. They can help you determine whether you should claim standard or itemized deductions, property tax deductions, etc.
Should You Buy or Should You Rent?
Although there are tax benefits to owning a home, as discussed above, many people are still choosing to rent. However, when you start to look a little deeper, you will find that buying offers many additional advantages to renting.
Did you know that becoming a homeowner can vastly increase your net worth? According to the Survey of Consumer Finances, those who own their homes tend to have a higher net worth when compared to renters. In 2019, for example, homeowners in the United States had a median net worth of $255,000. In contrast, renters had a net worth of only $6,300. This is a massive gap, and it shows just how beneficial it is to become a homeowner, particularly in terms of net worth—and tax advantages.
Another interesting way to look at renting vs. buying: No matter what the current interest rates are, when you rent, 100% of your monthly payment is going towards “interest.” You may get your security deposit back when you move out, but all the equity you poured into the home stays with the landlord.
If you’re curious about how much you could save if you opt to buy a home rather than continue renting, check out a rent vs. buy calculator, which allows you to see the difference. You can input the new home purchase price, down payment, and current monthly rent. The calculator will let you know how much you could be saving and just when those savings will start to kick in.
Once you see the savings, along with the tax benefits of a mortgage, you may want to start looking into your loan options. The sooner you get a mortgage, the sooner you can start saving money and growing your net worth. Contact us today to discuss your options and find out what you qualify for!
