In the first year of home ownership, applying the right tax credits and deductions is crucial in offsetting your expenses. To take advantage of the available programs, you will likely need to make big changes to the way you approach your tax calculations, especially if you routinely apply the standard deduction. In the end, you will likely see a marked decrease of your tax burdens upon claiming the right elements on your taxes. Here are four tax planning tips you can utilize to take the sting out of buying your first home.
Smartly Utilize IRA Funds
If you need a little bit extra money for a down payment or closing costs, you can take up to $10,000 out of your individual retirement account, or IRA, to cover those expenses. Although you are normally subject to a penalty for early withdrawals, applying the funds to the purchase of your first home relieves you of this obligation. You will lose the potential for increased compound interest gains, however, so restore your IRA balance as soon as you can to continue building wealth for retirement.
Complete Wise Home Upgrades
You can dramatically decrease your tax obligations, and potentially receive a refund, by making key improvements to your home before the end of the tax year. If you invest in energy efficient upgrades, for example, you can apply federal tax credits that will offset those costs and decrease your tax burdens. If you run your own business, or complete certain work tasks at home, you can carve out a dedicated space for those activities to claim the home office deduction at the end of the year.
Even if you cannot immediately apply credits or deductions for home improvements, it is important to keep receipts for your renovation projects. When you sell your home in the future, you may be able to deduct a portion of those expenses, but only if you have the receipts on hand.
Itemize Your Deductions
You may be eligible for a multitude of home ownership deductions in the first year after buying your home and beyond. You will need to skip the standard deduction, and itemize, to claim the full range of programs. You may be able to claim a portion of your mortgage interest and points, private mortgage insurance premiums and real estate taxes by itemizing each of your deductions for the year.
Apply Applicable Credits
Home ownership credits offered by way of the Mortgage Credit Certificate Program will offset your tax burdens even further. This program starts in the first year of home ownership and continues through the life of the loan. Upon electing to participate in this program, you will receive up to 30% of your mortgage interest back in the form of a federal tax credit. You must acquire a mortgage credit certificate from your local government office to apply this credit to your taxes.
Preparing Your Taxes After Purchasing a Home
If you want to maximize your deductions and apply the right credits, work with a tax expert at Alliance Financial & Income Tax. Your MO tax professional will apply all of the right elements to your tax calculations to help you reduce your obligations and maximize your refund potential. With a tax expert by your side, you will be able to smartly offset your home purchase costs and fully enjoy the benefits of home ownership.
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