Tax tips for homeowners


If you're a homeowner you can save money by taking advantage of federal tax deductions designed to promote homeownership. You are encouraged to examine the exemptions carefully to ensure that you're getting the most benefit from your home. These deductions reduce the amount of income tax you pay to the IRS.

You qualify for the following tax breaks if: If your income is more than $57,350 ($114,700 if married filing jointly), your deductions may be limited. And, if your marital status changed during 1995, you use part of your home as an office or you own more than one home, your exemptions will be slightly different. Tax issues are complicated, with provisions and interpretations changing on a fairly constant basis, so consult a tax professional for specifics.

Home mortgage interest deduction

The most substantial tax deduction for homeowners is the mortgage interest deduction. In most cases, homeowners may deduct the full amount of money paid for interest, either monthly or up-front at closing, during the taxable year. Earlier this year, your lender should have sent you a form that itemized the mortgage interest and fees you paid in 1995. You can deduct the full amount of interest paid if one the following statements is true:

(1) You took out your mortgage on or before Oct. 13, 1987. If you have since refinanced that mortgage, it still qualifies as long as your home was collateral for the original and refinanced loans at all times.

(2) You took out a mortgage after Oct. 13, 1987, and used the money to buy, build or improve your home. This type of mortgage is called a home acquisition loan; interest paid on the first $1 million ($500,000 or less if married filing separately) is deductible.

(3) You took out a mortgage after Oct. 13, 1987, and used the money for purposes other than to buy, build or improve your home. This type of mortgage is called a home equity loan; interest paid on the first $100,000 ($50,000 or less if married filing separately) is deductible.
"The home mortgage interest deduction is one of the main financial benefits of owning a home," says Cathy Whatley, president of FAR and Buck & Buck Inc. in Jacksonville. "Often, it's the difference between being able to own a home and not being able to." Some 24 million tax payers nationwide take advantage of this deduction each year.

Be sure you only deduct the amount you paid for interest charged in 1995. Prepaid interest that applies to 1996, such as that paid late in the year into an escrow account, may not be deducted on your 1995 return.

Local property taxes

You may also deduct the amount you paid in local real estate taxes as long as you and other homeowners in your area paid a uniform rate and the funds raised by the tax benefited the general public. For example, the amount you paid to support public schools is deductible but the amount you paid for trash collection is not.

To determine which local taxes are deductible, review the real estate tax bill issued by your taxing authority. If you have not received a bill for 1995, call your taxing authority.

"It's commonplace for lenders to require homeowners to keep a surplus of money in an escrow account to cover upcoming bills," Whatley says. "This means that some of the money you paid to your lender in 1995 may actually apply to 1996," she explains. Be sure you only deduct money that was paid to your taxing authority during 1995.

And, if any 1995 local taxes were refunded to you, subtract them from the amount to be deducted from your federal taxes.

The bottom line

So what does this mean to you? "A homeowner could save hundreds of dollars each month," says Steve David, a real estate tax instructor and president of Century 21 TriCity Realty Inc.

For example, David explains, homeowners who have mortgaged $100,000 may pay roughly $6,000 in mortgage interest and $3,000 in property taxes (depending on where the home is located) each year. Assuming that these fees qualify as deductible expenses, homeowners in the 28 percent tax bracket could save $2,520 each year, or $200 a month, in income taxes.

For more information

To find out more about these deductions or other tax breaks for homeowners, contact a tax professional, call the IRS at 800/829-1040 or review the following IRS publications: Home Mortgage Interest Deduction (Pub. 936), Tax Information for First-Time Homeowners (Pub. 530), Moving Expenses (Pub. 521) and Selling Your Home (Pub. 523). You can find most of these publications in your local library.
On the Internet, you can find more information on the IRS home page (www.fedworld.gov).