Ten years ago, the U.S. government provided the first-time homebuyer two different credits for first-time purchasers who bought homes between April 9, 2008 and April 30, 2010, with a closing date no later than Sept. 30, 2010. Those who lived in their first-time home for a consecutive five-year period —anytime between 2000 and 2002—could claim a one-time tax credit of 10 percent of the home’s purchase price, up to $6,500. Those who bought or closed on a first-time primary residence during the program’s three-year span, ending Sept. 30, 2010, could qualify for a tax credit of 10 percent of the home’s purchase price, up to $8,000.
In an effort to streamline the tax code, the new tax legislation has eliminated some of the special credits provided to first time homeowners. However these may be offset by lower tax rates overall and a much larger child credit as a help to families.
Although some changes are being introduced in 2018, it is important to understand which deductions and credits still may help the taxpayer who is buying a home for the first time.
Existing First-Time Homebuyer Credits
To claim the home mortgage interest deduction, Form 1098 can be obtained from the loan provider at the end of the year. This form will show the amount of interest paid on the mortgage. That amount can be added to Schedule A on the 1040 tax return as well as any other deductible expenses for the tax year—not only those related to homeownership, but all other categories. The total amount on Schedule A should exceed the standard deduction on the 1040. The difference between these amounts can be claimed as the Home Mortgage Interest Deduction.
The potential tax savings can be significant because the deduction applies to interest paid on loans of up to $1 million, or $500,000 for those who are married but filing a separate return, but only through 2017. Note: As new tax legislation, “Tax Cuts and Jobs Act” has recently passed, the deduction limit pertaining to mortgage interest drops to $750,000 of debt on a primary residence, but it remains $1 million for homes purchased before Dec. 15, 2017.
To be eligible, a homeowner needs to present a Mortgage Credit Certificate that is usually issued by state or local government when a mortgage is secured. This certificate documents how much interest can be claimed as a credit. Depending on the home’s purchase price, a buyer can claim up to 30 percent of the loan interest as a tax credit.
It works like this: By completing IRS Form 8396 for the mortgage interest credit, a homeowner determines, for example, if she is eligible for a $1,000 credit. That $1,000 can be applied directly to any tax liability on the 1040 return. If, for example, she owes $1,500 in taxes for the year, the $1,000 credit can reduce that liability to $500.
Those claiming the home mortgage interest deduction must include whatever amount they are claiming with the Form 8396 mortgage interest credit on Form 1098, reducing the amount of the deduction by the amount of the credit.
Borrowers, especially first-time homebuyers who routinely must pay higher “points,” can claim this cost as a tax deduction.
This deduction presents two savings: Not only can the cost of “buying points” be deducted, but it causes borrowers to make as substantial a down payment as possible, which lowers the amount of interest paid over the life of the loan.
The mortgage points deduction can be itemized on the 1040 return. The mortgage’s settlement disclosure statement must specifically identify fees as “points.”
One-Time Only IRA Break
The IRS allows one other tax break to first-time homebuyers that is often overlooked when waiving penalties associated with withdrawing from IRA savings accounts before age 59½.
Taxpayers can withdraw up to $10,000 from an IRA without penalty to buy a home, although they must pay taxes on whatever they withdraw. Right now, 401(k) plans do not qualify for the exception to the 10 percent penalty.
For more on the benefits of home ownership: https://www.e-file.com/help/home-ownership.php