With tax day right around the corner, most of us reach for the aspirin when we think about stroking a check to Uncle Sam in a few weeks. The tax code is complicated and ever-changing so it is easy to get lost in the fog of papers, forms, and statements. Sometimes it’s easy to forget that your home can be a tremendous asset when combing through all of the potential deductions.
The Wall Street Journal recently highlighted some of the best home-related tax tips. The article points out some well-known strategies and also highlights some of the more recent (and overlooked) home-related deductions that you can take advantage of.
The most well-known home-related tax benefit is the mortgage interest deduction. Obviously this is a big one but there is a small wrinkle that can help you wring the most out of the opportunity. If you have a HELOC or a second home and want to make the most of the opportunity, deduct your most recently closed loan first. This should be the one with the highest interest expense–which is what you want. Here is why: in the first year of a mortgage, most of the monthly payment is interest. As you get closer to year 30 it shifts over to payment of principal. The experts cited in the article stress that running the numbers is the only way to be sure–I would suggest doing so with your tax preparer just to be safe.
The article also points to the home office deduction as a good one to utilize. I agree but this one is tricky so be sure that you meet all of the (very specific) criteria. The IRS has a page dedicated to the home office deduction. Your tax prep professional should also be able to offer you solid guidance on this particular home-related tax deduction.
One of the lesser-known deductions is for home energy credits. You can claim these credits (extended for an additional year by Congress) if you’ve installed new windows, an energy-efficient roof, or some other IRS-approved energy-saving improvement. While this is not the most lucrative deduction (limited at $500 per category–see here for details) it can be helpful for homeowners who have been in their homes longer and who have made incremental improvements.
There is a lot of “advice” out there about real estate tax deductions – must of it erroneous. In my view, the three best ways to ensure that you are getting the most out of your home ownership when tax time comes are to (a) talk to your tax preparer, (b) keep good records, and (c) look straight to the horse’s mouth (the IRS) for accurate information. The IRS actually maintains a page dedicated to real estate tax tips – it could be well worth your time to just browse and see if any of these topics apply to you.