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==== ==== Pay Zero Taxes Like The Wealthy Do ==== ====

Owning a home has many benefits including the potential to reduce your federal tax burdens. However, in order to take advantage of these benefits you'll have to graduate from the quick and simple form 1040EZ to the 1040 long form and itemize deductions on Schedule A. Whether or not it makes sense for you to use the short form or long form depends on if you have enough qualified deductions that exceed the threshold for the standard deduction. Your standard deduction is determined by your filing status as is either $5,000 (if you're single or married filing separately), $7,300 (if you're a head of household), or $10,000 (if you're married filing jointly). Once you've determined your standard deduction then compare that amount to the deductions on Schedule A and use the larger of the two deductions. There are several homeowners' expenses that can be deducted by using Schedule A. The largest is mortgage interest payment unless the loan exceeds $1 million. In addition, IRS guidelines allow interest payments for home equity loans (HEL) or home equity lines of credit (HELOC) to be deducted under certain circumstances. In general, the interest of a HEL or HELOC is fully deductible if it is $100,000 or less. The exact amount that is deductible will depend on the amount left on your first mortgage. When the combined debt of a first mortgage and HEL or HELOC exceed the value of the property, interest deductions are limited by the IRS to the smaller amount of interest on a $100,000 loan on the property value less the mortgage amount. For example, you purchased a home several years ago with a very small down payment. The balance on your mortgage is $90,000, and the property is worth $105,000. You decide to take out a 125 percent loan-to-value equity line of credit which amounts to $41,250 ($105,000 x 125 percent = 131,250 - $90,000 first mortgage balance). You're also hopeful that the interest on this loan is deductible on your federal tax return. Under current tax rules, you will not be able to deduct the full amount of interest on the loan. Since the loan exceeds the value of the house, interest can only be deducted on $15,000 of the loan. That amount is arrived at because the amount of the loan that exceeds the value of the house is excluded. Therefore, the deduction is limited to the difference between the value of the property ($105,000) and the amount of the first mortgage ($90,000) which is $15,000. Interest payments on the $26,250 that exceeds the value of the house are thus not allowed. Therefore it's important not to make the mistake of assuming you can deduct all interest on home equity debts.

You can however, get a tax break if you pay points to get a better rate on your different home loans. The problem is exactly when to claim it. If, amongst other things, the loan is to buy or build your own house, the point system is practiced in your neighborhood and it's within the normal range, then the IRS will let you deduct points in the year you paid them. It's important though that your loan meets all the required qualifications so that you can get all your deducted points at once. In order for a homeowner who pays point on a refinanced loan to get this break, the points must be deducted over the life of the loan. For example, if you paid $2,000 in points to refinance your mortgage for 30 years, you will only be able to deduct $66.72 if you made 12 payments in one year on the new loan. When extra cash made from refinancing is used to make improvements on the house, points can be fully deducted on that money in the year you paid the points. If, however, the extra cash is used for something else other than work on the house, only part of the points can be deducted on one tax return. Much in the same way that home equity loans or lines of credit works. Note that it's only some of the points you get from the refinancing money you used for home improvements that will qualify you for immediate tax-deduction purposes. Plus, the points taken from the present refinanced mortgage balance must be paid back during the course of the loan. Another important deduction that's related to your home is property taxes. Taxes, which go into an escrow account yearly, play a very big part of your monthly loan payments. Since these taxes are an annual deduction, the amount must be included on the annual statement you receive from your lender, along with your loan interest information. For those who are spending their first tax year in their house, check the additional tax payment data on your settlement sheet. You see, when you bought your house the year's tax payments were divided between you and the seller so that you both paid the taxes for that portion of the tax year during which you owned the house. The good news is that you can fully deduct your share of these taxes. Bear in mind though that your money will not be deductible if your settlement statement indicates that you paid into an escrow account for future taxes. In fact, only the taxes in the year your lender actually pays them to the property tax collector are deductible.

Earnest Young is an Accounting and Tax writer for Accent Accounting & Taxes

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==== ==== Pay Zero Taxes Like The Wealthy Do ==== ====

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