Homeownership and Your Taxes

Isaias C. Sarmiento

Financial Literacy Coordinator

Quincy Community Action Programs, Inc.

Form 1040 (page 1)

Income (Lines 7-21)

Adjustments (Lines 23-35)

Adjusted Gross Income: AGI (Line 37)= Income – Adjustments

Form 1040 (page 2)

AGI (Line 38)

Standard deduction or itemized deductions, whichever is greater (Line 40)

Exemption of $3650 per person (Line 42)

Taxable Income (Line 43)= AGI – (standard deduction or itemized deduction, whichever is greater) – exemption

Your Tax

Taxable income (Line 43)

Tax (Line 44) The tax is based on your taxable income. The tax is the amount that really belongs to

the federal government. It can be reduced by credits, e.g. child tax

credit, child care expenses, education credit.

Standard Deduction

You are entitled to a standard deduction based on your filing status...

Filing Status Standard Deduction (2009)

Single Married Filing Separately

$5700

Head of Household $8350

Married Filing Jointly $11,400

Itemized Deduction

…or you can take an itemized deduction if certain expenses add up to more than your standard deduction.

You can take only the standard deduction or the itemized deductions, both not both.

How much in taxes will you save if you itemize? (Single people) Scenario 1

Single, no childrenAGI: $40,0001 personal exemption of $3650

Standard deduction of $5700

Taxable income: 40,000 – 3650 – 5700

= $30,650 Tax: $4180

How much in taxes will you save if you itemize? Scenario 2

Single, no childrenAGI: $40,000

$200,000 mortgage for 30 years, 5.5% rateItemized deductions of $14,713

Taxable income: 40,000 – 3650 – 14,713

= $21,637 Tax: $2828

How much in taxes will you save if you itemize? (Married people) Scenario 1

Married filing jointly, 1 childAGI: $40,0003 personal exemptions: $10,950 ($3650 X 3)

Standard deduction of $11,400

Taxable income: 40,000 – 10,950 – 11,400

= $17,650 Tax: $1813

How much in taxes will you save if you itemize? (Married people) Scenario 2

Married filing jointly, 1 childAGI: $40,0003 personal exemptions: $10,950 ($3650 X 3) $300,000 mortgage for 30 years, 5.5% rateItemized deductions of $19,597

Taxable income: 40,000 – 10,950 – 19,597= $9453

Tax: $945

What qualifies as itemized deductions?

Mortgage interest PMI (private mortgage insurance) Points Real estate property taxes State taxes withheld Personal property taxes (e.g. excise car tax) Charitable contributions Unreimbursed medical expenses

What qualifies as itemized deductions?

Unreimbursed employee expenses Investment expenses Casualty and theft losses Gambling losses to the extent of gambling

winnings Hobby losses to the extent of hobby income

Mortgage Interest and Real Estate Property Taxes

Shown on Form 1098 that you get from your mortgage company.

State Income Taxes

You can get a deduction for state income taxes withheld.

State refunds are NOT taxable income if didn’t itemize deductions the previous year.

State Income Taxes

If you itemize deductions and you get a state refund, then the refund is taxable income on your federal return the following year.

If you itemize deductions and you owe state taxes, then you can deduct the taxes on your federal return the following year.

Charitable Contributions

You can deduct charitable contributions, but you must have written proof. Cancelled bank check Document from the organization

Unreimbursed Medical Expenses

You can deduct expenses for you, your spouse, or a dependent.

Deduction = Medical expenses – 7.5% of AGI

For example, medical expenses = $3000. If AGI = $30,000, then 7.5% of AGI is $2250. That means you can deduct only $750 ($3000 – $2250) of your medical expenses.

Unreimbursed Employee Expenses

Deduction = Employee expenses – 2% of AGI

For example, employee expenses = $3000. If AGI = $30,000, then 2% of AGI is $600. That means you can deduct only $2400 ($3000 – $600) of your employee expenses.

Tax Planning

If you buy a house early in the year, you are more likely to itemize deductions for that year.

If you buy a house late in the year, you are less likely to itemize deductions for that year.

Tax Planning

In the early years of homeownership, you pay a lot of mortgage interest, so you’re more likely to itemize deductions.

In the later years of homeownership, you pay little in mortgage interest, so you’re less likely to itemize deductions.

First-Time Homebuyer Credit

A first-time homebuyer is anyone who hasn’t owned a home and used it as a principal residence for the 3 years prior to the date of purchase.

Credit is 10% of the purchase price of the home, up to $8000, for buying a home in the United States between January 1 and November 30, 2009. This is a refundable credit.

The credit phases out if your income is more than $75,000 ($150,000 for married filing jointly).

First-Time Homebuyer Credit

You do not have to repay the credit as long as the house is your principal residence during the 3 years after you buy the house.

If you buy your first home in 2009, you can claim the credit on your 2009 tax return or on an amended 2008 tax return.

When you file your federal taxes, you need to complete Form 5405.

Tax Credit Advance for FHA loans

If you’re getting an FHA-insured loan, you can apply up to the maximum tax credit as additional down payment, other closing costs, or buying down the interest rate.

The tax credit cannot be used to meet your 3.5% minimum down payment.

Tax Credit Advance for MassHousing Loans

If you’re getting a MassHousing loan, you can apply up to the maximum tax credit as a loan toward closing costs.

If you don’t pay back the tax credit loan by June 1, 2010, then the loan amortizes over 10 years at the same interest rate as the first mortgage.

Energy Efficiency Tax Credit

Credit of 30% of the cost of qualifying improvements up to $1,500

Credit available for 2009 and 2010 Qualifying improvements include:

adding insulation energy-efficient exterior windows, doors,

skylights energy-efficient heating and air conditioning

systems natural gas, propane or oil water heaters

IRS Resources

Pub 530: Tax Information for First-Time Homebuyers

Pub 936: Home Mortgage Interest Deduction Pub 526: Charitable Contributions Pub 502: Medical Expenses Pub 529: Miscellaneous Deductions

IRS Resources

All itemized deductions http://www.irs.gov/taxtopics/tc500.html

Home energy credits Go to www.irs.gov. Type in the search engine

“Energy-Saving Steps This Year May Result in Tax Savings Next Year.”