Buying your first house will most likely be your largest purchase to date. It is amazing to finally own your own space. However, it can also be worrisome due to the sheer size of the transaction. Many homeowners used to deduct items such as their moving expenses and the mortgage interest deduction to ease the thought of their new mortgage payments. The Tax Cuts and Jobs Act (TCJA) reduced itemized deductions such as these, but there are still ways to use your new house to your advantage on your tax return.
1) Tax Credit
The purpose of this credit is to help people in lower income brackets have the ability to buy their new home. Because this is a tax credit, it is beneficial because it reduces the amount of tax you owe. You need to have a state-issued Mortgage Credit Certificate to qualify. The amount is based on financial need and the price of the home you are buying. You could claim the mortgage interest credit even if you take the standard deduction. A home mortgage interest deduction can only be taken if you itemize your deductions. This is why it is different.
2) State Incentives
Every state offers a specific incentives for buying a new house. All of these programs are for first-time home buyers and will most likely help you to get a mortgage with a smaller down payment. Ask our lenders about incentives for the state of California.
3) Tax Deductions on Local Property
A property tax deduction is a state and local tax that is deductible from federal income taxes. These can include real estate taxes as well. Before the Tax Cuts and Jobs Act (TCJA) was passed, you can deduct an unlimited amount for these taxes. The new cap after the tax reform is ten thousand dollars for tax years 2018 through 2025.
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4) IRA Payouts That Are Penalty-Free
If you currently have an IRA or other pre-tax retirement savings account, you may be able to withdraw some of that money to help you pay for your first house. Because these accounts are meant to be utilized when you reach the age of 60, there are usually fees when it comes to early withdrawals. But if you are buying your first house, you could deduct ten thousand dollars from your traditional IRA without penalty. Your spouse can also withdraw ten thousand dollars from their account for the same purchase. If you currently have a Roth IRA, you could withdraw contributions you have made without penalties at any time. If your account is five years old at the very least, then your withdrawal would also be tax-free. But this should be a last resort because it will take time to build up your savings again.
5) Home Improvement Tax Credits
Certain home improvements you make to your new home could qualify for the Residential Renewable Energy Tax Credit. If you install any solar panels or other solar energy sources, you would be able to qualify for this credit to use on your tax return.
Do you have a question about the tax benefits for First-Time Homeowners? Call the Reed Team today at 949-392-6400!