By Joe Silver
The federal tax landscape changes each year. Congress adjusts the tax code frequently, and first time home buyer tax credit has been a revered incentive for homeownership in the past. 1st time house buyers need to stay aware of the changes to tax laws.
Under President Trump, we may see first time home buyer tax credits change somewhat, although it is only speculation at this point. But we think there is a good chance that President Trump may provide additional first time home buyer tax credit enhancements in 2017 and beyond.
The US government wants to encourage home ownership. People owning their homes makes for more prosperous, attractive, safe and stable communities. Home owners also stimulate the economy more than renters, as they buy products and services to improve and maintain their properties.
The government offers tax breaks for both new, first time home buyers and existing home owners. Owning your own home offers several home tax deductions, tax credits and other tax benefits that you do not get as a renter. If you are planning to buy your first home in 2017, you should know about first time homebuyer tax credits so you can reduce your taxes.
The mortgage interest tax deduction is probably the biggest tax benefit you get as a home owner. It is a big deal to the first time home buyer. If you buy a house with a mortgage, you can tax deduct up to $1 million in interest on your mortgage in most cases.
This 2017 first time home buyer tax credit can be very helpful to home owners with new loans; interest charges on mortgage loans are always higher in the early years of the mortgage. So, a first time home buyer is getting a major tax break right from the start.
Loan amortization works in such a way that the initial payments have more interest than principal. This reverse at the end of the loan.
If you want to receive this tax break, you will need to itemize on your tax return on Schedule A. To do so, you will add up all of your tax deductible expenses for last year, including all that are related to owning a home.
Claiming the mortgage interest tax break will save you a good deal on taxes as long as the itemized deductions are higher than the standard deduction that you get from the government.
You should get a Form 1098 a month or so after the tax year ends. It will state the amount of mortgage interest you paid last year.
The mortgage interest credit offers another chance for the first time home buyer to get a tax break for whatever mortgage interest they paid last year. This is different than the mortgage interest deduction, which drops your taxable income.
The mortgage interest credit directly reduces the taxes you owe.
This is a more unknow n tax benefit for new home owners that can be a real money saver. Depending on what you bought your home for, you may be able to get up to 30% of the interest you pay every year back as a tax credit.
Let's say you prepare your tax return and you owe the IR $1000. However, if you complete IRS Form 8396, it may show that you are eligible for a $1000 tax credit. In this case, you can apply the tax credit and you don't owe anything to the IRS.
This is not a refundable tax credit, so you do not get a check in the mail if the tax credit is higher than what you owe the government.
To get this tax break, you need to have a Mortgage Credit Certificate issued to you by your state or local government. You must reduce your mortgage interest deduction by the same amount; you cannot claim both the credit and the mortgage interest tax deduction.
When you buy your first home, you also may deduct anything you paid in points to get the mortgage loan at a lower rate. Points are prepaid interest that can help you to get a lower rate over the loan's life.
Many first time home buyers do not know that they can deduct their mortgage points off of their income. Buying points to drop your rate is one of the best benefits available to home buyers in 2017. Experts say the ROI is double because you can deduct the point's cost, and also the amount on interest paid in the same year you bought the home.
Your settlement statement has to specify these items specifically as 'points.' Your mortgage will have to be for less than $1 million.
Saving for a down payment and closing costs is a major obstacle for many new home buyers. However, the IRS says it is okay to take out funds from your IRA to help.
First time home buyers who get money from their IRA to pay the down payment do not need to pay the 10% penalty that you normally must take if you pull the money out before age 59.5.
You may deduct as much as $10,000 from an IRA without penalty to purchase a home. You will still need to pay tax on that money. Note that your 401k plan does not qualify for this exemption.
First time home buyers also benefit from deducting property taxes from their income. In high property tax states, such as Texas, this can be several thousand dollars taken off your income.
First time home buyers enjoy many generous tax breaks, both in 2017 and in the future. We think that President Trump may increase some of these tax breaks in the next four years to stimulate the housing market further.
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