The government provides tax breaks for first time home buyers as a way to increase homeownership in the United States. But did you know of all the tax breaks that are available to you?
Home Mortgage Interest Deduction
The biggest tax break you can get is the Home Mortgage Interest Deduction. In this deduction, you can potentially have your interest paid on loans up to $1 million. $500,000 for those who are married but filing a separate return. Why is this great for first-time buyers? This is great because interest charges on mortgages are usually higher in the earlier years of your mortgage. So you could use this tax break later, but the biggest break will be on those earlier years in the mortgage.
Mortgage Interest Credit
The Mortgage Interest Credit and Mortgage Interest Deduction are very similar. Instead of deducting your income like the Mortgage Interest Deduction, the Mortgage Interest Credit lowers what you owe by crediting towards your tax bill. Depending on the purchase price of your home, a buyer can get 20 to 30 percent of the interest they pay every year as a straight tax credit. It is also important to note that the credit is not refundable, so you can’t receive a check if the credit is greater than what you owe.
To get this tax credit, you will need to issue a Mortgage Credit Certificate. This will normally be issued at the time you originate the mortgage. The certificate will tell you the amount of interest you can claim as a credit. If you’d like to do both, you have to claim the credit by the amount you deducted. You aren’t allowed to use both at the same time.
Mortgage Points Deduction
You can deduct what you pay in points to obtain the mortgage loan. The points are essentially prepaid interest that can help a borrower qualify for a lower interest rate over the life of the loan. They can qualify for a deduction as well. This is a great break to utilize because you can also use the points in addition to the interest paid!
Using the points is more complex when filing. You need to itemize on your return and your settlement disclosure statement must specifically cite these fees as “points.”
Tax-Free IRA Withdrawals
Did you know you can take money from your IRA without penalty if you use it to help save up for a down payment? Using your IRA does not stop you from having to pay taxes on the money, however. You shouldn’t use your 401K plan though because it does not qualify for the exception.