Tax Deductions You Need to Know About!

While one would never have imagined the iconic words of yesteryear, "Why do you ask for whom the bell tolls, for it tolls for thee", to be construed as an act of benevolence from our Great Benefactor, Uncle Sam, it doth still ring true! True that, he takes more than he ought, but there are more than enough 'bells' to go around when it comes down to the generous tax breaks afforded to thee taxpayer!

 

 According to IRS.gov, here are some of the deductions you are allowed to take:

 

Your house payment If you took out a mortgage (loan) to finance the purchase of your home, you probably have to make monthly house payments. Your house payment may include several costs of owning a home. The only costs you can deduct are real estate taxes actually paid to the taxing authority, interest that qualifies as home mortgage interest, and mortgage insurance premiums. These are discussed in more detail later.

 Minister's or military housing allowance. If you are a minister or a member of the uniformed services and receive a housing allowance that is not taxable, you still can deduct your real estate taxes and your home mortgage interest. You do not have to reduce your deductions by your nontaxable allowance.

 Hardest Hit Fund and Emergency Homeowners' Loan Programs

You can use a special method to compute your deduction for mortgage interest and real estate taxes on your main home if you meet the following two conditions.

1. You received assistance under:

   1. A State Housing Finance Agency (State HFA) Hardest Hit Fund program in which program payments could be used to pay mortgage interest, or

   2. An Emergency Homeowners' Loan Program administered by the Department of Housing and Urban Development (HUD) or a state.

2. You meet the rules to deduct all of the mortgage interest on your loan and all of the real estate taxes on your main home.

 Real Estate Taxes

 Most state and local governments charge an annual tax on the value of real property. This is called a real estate tax. You can deduct the tax if it is based on the assessed value of the real property and the taxing authority charges a uniform rate on all property in its jurisdiction. The tax must be for the welfare of the general public and not be a payment for a special privilege granted or service rendered to you.

Deductible Real Estate Taxes

You can deduct real estate taxes imposed on you. You must have paid them either at settlement or closing, or to a taxing authority (either directly or through an escrow account) during the year. If you own a cooperative apartment, see Special Rules for Cooperatives, later.

Real estate taxes paid at settlement or closing. Real estate taxes are generally divided so that you and the seller each pay taxes for the part of the property tax year you owned the home. Your share of these taxes is fully deductible if you itemize your deductions.

Refund or rebate of real estate taxes. If you receive a refund or rebate of real estate taxes this year for amounts you paid this year, you must reduce your real estate tax deduction by the amount refunded to you. If the refund or rebate was for real estate taxes paid for a prior year, you may have to include some or all of the refund in your income. For more information, see Recoveries in Publication 525, Taxable and Nontaxable Income.

 

Sales Taxes

 

Generally, you can elect to deduct state and local general sales taxes instead of state and local income taxes as an itemized deduction on Schedule A (Form 1040). Deductible sales taxes may include sales taxes paid on your home (including mobile and prefabricated), or home building materials if the tax rate was the same as the general sales tax rate. For information on figuring your deduction, see the Instructions for Schedule A (Form 1040).

Deductible Mortgage Interest

To be deductible, the interest you pay must be on a loan secured by your main home or a second home. The loan can be a first or second mortgage, a home improvement loan, or a home equity loan.

Prepaid interest.  If you pay interest in advance for a period that goes beyond the end of the tax year, you must spread this interest over the tax years to which it applies. Generally, you can deduct in each year only the interest that qualifies as home mortgage interest for that year. An exception applies to points, which are discussed later.

 Late payment charge on mortgage payment.  You can deduct as home mortgage interest a late payment charge if it was not for a specific service in connection with your mortgage loan.