As we close out an eventful 2016 many of us are scurrying around trying to get things squeezed into this year and not let fall into 2017. Some of these things might mean reviewing what our resolutions for 2016 were and see how well we did, or didn’t, do.
It’s time to reflect on what we did last year and compare it to what we had actually planned. As it relates to finances, there are some things consumers should think about doing before the end of the year. Can we put more money into retirement? Have we fully funded our IRA? Is our investment portfolio properly balanced or do we need to do some shuffling?
Could Your Points Get You a Tax Deduction?
One of the things we do is begin gathering our financials from 2016 and start preparing for tax time. April the 15th comes every year and the more prepared we are ahead of filing the more savings we can realize. As it relates to homeownership, there are some definite income tax advantages owning and financing a home compared to renting a place to stay.
Certain provisions within our income tax code encourages homeownership and there are some basic benefits owning rather than renting including reducing the amount of income taxes we pay each year.
Is It Deductible?
It’s important to note you should speak with your own tax professional regarding income tax deductions but there are things that are generally accepted as being eligible for a tax deduction for those who itemize each year.
Owning a home means paying property taxes, insurance and for many a mortgage payment. Homeowner insurance isn’t tax deductible but if someone has a mortgage on the property you can bet the lender requires there be sufficient coverage on the property. Property taxes are an annual event but unlike insurance, property taxes are in fact eligible as an income tax deduction.
When homeowners take out a mortgage for the first time they suddenly see the benefit of being able to deduct mortgage interest from taxable income. Especially in the first few years of a mortgage loan when more interest is paid compared to the amount toward the loan balance, the deduction can be a very pleasant surprise because mortgage interest is also tax deductible.
Closing costs when financing a home however are generally not tax deductible. They’re a one-time charge for services needed in order to obtain a mortgage loan approval but even though they’re needed before a lender will place a loan those fees are an expense and not income tax deductible.
Did you buy a home and pay discount points to the lender? Then you might very well have an additional income tax deduction. Discount points, or “points” are expressed as a percentage of the loan amount. Mortgage lenders offer a range of interest rates on each loan program offered. Some of the rates include points to some degree while other rates do not have any points.
For example, using a standard 30 year fixed rate home loan, a lender might offer a 4.00% rate with one point and 4.25% with no points. On a $400,000 loan, one point is equal to $4,000. If a buyer wanted a lower rate, in this example a 4.00% rate instead of a slightly higher 4.25% rate, the buyer would give the lender $4,000 at the closing table and in return get the lower rate.
Using these numbers, the 4.25% rate provides a $1,967 principal and interest payment. In exchange for the $4,000 point, the rate of 4.00% results in a slightly lower payment of $1,909 for a savings of $58 per month. If you divide $4,000 by the $58 in monthly savings it will take just over 68 months to get the benefit of the lower monthly payment. You can speak with your loan officer and compare monthly payments both with and without points and decide whether or not it makes sense to pay points.
Paying points provide a lower payment but there is also a benefit come income tax time: another income tax deduction. If you paid any number of points when you purchased your home in 2016 those points can be tax deductible, just like property taxes and mortgage interest. In fact, a discount point is considered a form of prepaid interest to the lender and therefore tax deductible.
If you refinanced an existing mortgage and paid a point to lower the rate, the deduction is there but only over the life of the loan. For a 30 year loan and a $4,000 point, each year the homeowner can deduct $133 each year.
In order to deduct the full amount of points in the year you paid them, you’ll need to follow these guidelines:
• The points apply to the property you consider your primary residence and can be used to buy or build the property
• It is common to pay points where you live and consistent with points others pay
• You deduct expenses in the year you paid them (Cash Accounting)
• The points must be used to lower the rate and not offset other fees such as an appraisal or inspection
• You must have paid the points out of your own pocket and not borrowed
• The amount paid is stated on your settlement statement as well as expressed as a percentage of the loan amount
Again, you’ll need to speak directly with your tax professional or accountant about the deductibility of any expense, including paying points, but points do provide a benefit beyond just lowering the rate on a home loan : points can also reduce your tax liability.