Here are the tax tips you need to get a jump on your returns.
By DONA DEZUBE
The federal tax law signed by President Donald Trump Dec. 22, 2017, goes into effect for the 2018 tax year and generally doesn’t affect tax filings for the 2017 tax year. Here’s a detailed summary of the changes.
Owning a home can pay off at tax time.
If you’re eligible, take advantage of these home ownership-related tax deductions and strategies to lower your tax bill:
Mortgage Interest Deduction
To claim the mortgage interest deduction, you must itemize using Schedule A, and your mortgage must be secured by your primary or second home. That home can be a house, trailer, or boat, as long as you can sleep in it, cook in it, and it has a toilet.
Interest you pay on a mortgage of up to $1 million — or $500,000 if you’re married filing separately — is deductible when you use the loan to buy, build, or substantially improve your home.
If you take on another mortgage (including a second mortgage, home equity loan, or home equity line of credit) to improve your home or to buy or build a second home, that counts towards the $1 million limit, and the interest is still deductible.
If you use loans secured by your home for other things — like sending your kid to college — you can still deduct the interest on loans up $100,000 ($50,000 for married filing separately) because your home secures the loan. However, this rule changes for 2018, and the interest on such loans will no longer be deductible unless the proceeds are used to substantially improve a home.
Beginning with tax year 2018, the mortgage interest deduction cap is $750,000, and fewer people will likely itemize (and therefore take the MID) because of the increase in the standard deduction.
Prepaid Interest Deduction
Prepaid interest (or points) you paid when you took out your mortgage is generally 100% deductible in the year you paid it along with other mortgage interest. However, you must itemize to take it.
If you refinance your mortgage and use that money for home improvements, any points you pay are also deductible in the same year.
But if you refinance to get a better rate or shorten the length of your mortgage, or to use the money for something other than home improvements, such as college tuition, you’ll need to deduct the points over the life of your mortgage. Say you refi into a 10-year mortgage and pay $3,000 in points. You can deduct $300 per year for 10 years.
So what happens if you refi again down the road?
Example: Three years after your first refi, you refinance again. Using the $3,000 in points scenario above, you’ll have deducted $900 ($300 x 3 years) so far. That leaves $2,400, which you can deduct in full the year you complete your second refi. If you paid points for the new loan, the process starts again; you can deduct the points over the life of the loan.
Home mortgage interest and points are reported on Schedule A of IRS Form 1040.
Your lender will send you a Form 1098 that lists the points you paid. If not, you should be able to find the amount listed on the closing docs you got when you purchased your home or refinanced.
Property Tax Deduction
Again, for 2017, you can deduct on Schedule A the real estate property taxes you pay if you itemize, without limit. If you have a mortgage with an escrow account, the amount of real estate property taxes you paid shows up on your annual escrow statement.
For tax year 2018 and beyond, you can deduct local and state taxes, including property taxes, up to $10,000 combined. This again depends on whether you itemize, which many homeowners will not be able to do in 2018 due to a large increase in the standard deduction.
If you bought a house this year, check your closing documents to see if you paid any property taxes when you purchased your house. Those taxes are deductible on Schedule A, too.
Vacation Home Tax Deductions
The rules on tax deductions for vacation homes are complicated. Do yourself a favor and keep good records about how and when you use your vacation home.
If you’re the only one using your vacation home (you don’t rent it out for more than 14 days a year), you deduct mortgage interest and real estate taxes on Schedule A.
Rent your vacation home out for more than 14 days and use it yourself fewer than 15 days (or 10% of total rental days, whichever is greater), and it’s treated like a rental property. Your expenses are deducted on Schedule E.
Rent your home for part of the year and use it yourself for more than the greater of 14 days or 10% of the days you rent it and you have to keep track of income, expenses, and allocate them based on how often you used and how often you rented the house.
This article provides general information about tax laws and consequences, but shouldn’t be relied upon as tax or legal advice applicable to particular transactions or circumstances. Consult a tax professional for such advice; tax laws may vary by jurisdiction.
Reposted from HouseLogic