Soon Uncle Sam is going to be knocking on your door with his hand out. While April 15th is perhaps our least favorite day of the year, there are things you can do to save on your taxes. For example, you can save a bundle on your taxes by using mortgage interest deductions.
I would never recommend buying real estate because of the tax deductions that you will receive; but since you already have this property, let’s make sure it works for you. One way your house can save thousands of dollars every year is to make sure you are taking all of the allowable IRS deductions.
What is the Mortgage Interest Deduction?
This IRS tax deduction allows you to claim all of the annual interest payments you have made on your mortgage. This can substantially lower your tax bill. It is sort of the IRS’ way of rewarding you helping the economy by buying a home instead of renting.
Your largest mortgage interest deduction is going to be right at the start of your mortgage – now how nice is that? Since you pay more interest than principle in the beginning of your mortgage, your tax deduction will also be larger.
For example, say you financed $250,000 last year when you bought your house. The 30 year mortgage carried an interest rate of 4.5 percent. Your payment is $1,267 per month. During the year of 2016, you will have paid $11,167 in interest. Now wouldn’t you say that is a nice IRS deduction? But as time passes and you start paying less interest and more principle, your deduction is going to diminish. For example, 10 years later, your deduction is only going to be $8,881.
How to Deduct Your Mortgage Interest?
First, if you want to use the mortgage interest tax deduction, then you will have to itemize your deductions instead of taking the standard deduction. What is nice is that most of the online or tax software programs will allow you to test out both scenarios to see which total deduction is higher.
What Other Home Expenses can I Deduct?
Your mortgage interest is, by far, the largest single deduction you will make. But while you are itemizing all your deductions, you might as well include all of the other deductions allowed from owning a home.
On your itemized deduction sheet, you can also claim your property taxes and mortgage insurance. There are also deductions such as installing a home office or renovation work – but just make sure you consult with your CPA first to get all the details.
You need a place to live. You have to pay the interest on your mortgage. You might as well make that money pay you something back. Itemizing your tax deductions, so that you can include all your mortgage interest and other allowable living expenses, is an ideal way to do that.