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| Mortgage Interest Tax Deductibility |
| Written by Kristina Lee |
 History of Taxation Once upon a time, there were kings and queens, peasants and farmers. The royalty of the nations taxed their commoners on everything from income to property, to fuel their rich lifestyle. Well, soon life changed, and royalty turned into democratic governments, and their subjects to the citizens of the nation. Still taxes were imposed to run the nation. Slowly, the bright citizens of the nation found ways to limit their taxes, and through the accounting  loopholes that they all learned to love, realized that owning a home and other property was not quite as expensive as it seemed. Moreover, being indebted to own that property was favorable as well! And while the commoners of the ancient realms prepared to rebel against the monarchies that would oppress them, the citizens of our democratic nation have quieted themselves down and learned to deal with taxes in other ways, through those wonderful things called tax deductions. For, you see, there are only two things that are guaranteed in life: death (which one cannot avoid), and taxes (which, if you keep reading, you partially can). So now that you’re hooked, it’s time to talk about taxes, and how to milk your property and mortgages for every benefit you can get. A Little Tax Background Every person who earns income of some sort in the United States must file federal and state income tax returns. On these, taxpayers declare the amount of income they received in that taxable year (usually from January 1 to December 31 of a calendar year). They can then reduce their income by either the standard deduction or a Schedule A itemized deduction. They can then further reduce their income by taking the personal exemption credit. The standard deduction amount is based on the taxpayer’s status: single, married filing jointly, married filing separately, etc. Itemized deductions are based on the sum of: medical expenses over the 7.5% of Adjusted Gross Income threshold, state and local income taxes, charitable contributions, property taxes, and miscellaneous expenses that exceed the 2% of Adjusted Gross Income threshold. The taxpayer can then compare the deduction amount based on both cases (Standard vs. Schedule A) and take the larger of the two deductions. That’s where mortgages and property taxes come in. Schedule A Deductions The Schedule A portion of Form 1040 allows taxpayers to make itemized deductions, calculating the deductible amount of medical & dental costs, income and property taxes paid, interest paid, charitable contributions, casualty and theft loss, and other miscellaneous expenses that were incurred throughout the year. This amount is often greater than the Standard Deduction (based on status) and allows taxpayers to use the itemized deduction to reduce their net income, thus being taxed on a lower amount.  Mortgage interest: Mortgages require payments every month. Part of those payments go towards the interest on the mortgage, and part goes towards paying off part of the principal. During the earlier years of the mortgage, more interest than principal is paid, and vice versa for the later years. This is important, because the interest that is paid is deducible on Schedule A. So, taxpayers with mortgages can take a larger interest deduction during the first few years of their mortgage than they can in the later years.
Transfer Taxes: A one-time payment, a real estate transfer tax is a fee imposed on the passing of title from one person to another. This is deductible in the year in which the tax was paid (usually the year the property was purchased). Points: Also known as mortgage interest, these also include and are sometimes called loan origination fees, maximum loan charges, premium charges – basically, any charges solely for the use of money. Depending on the situation, they can be deducted in various years.
 Prepayment Penalty: Some mortgage contracts stipulate a prepayment penalty. This is tax deductible as home mortgage interest, as long as it is for the act of prepayment, and not for a specific service performed or cost incurred in relation to the loan. State Regulations: Every taxpayer must pay federal and state taxes. Mortgage interest paid in a taxable year is tax deductible on state returns, although exact specifications vary by state. For California, the mortgage interest deduction is the same as on the federal return. Visit your state’s tax board website for exact details. Disclaimer: This article is just a general guide to tax deductions. Consult with your tax preparer or a tax professional for exact details, and for yearly updates. |
| Last Updated on Wednesday, 22 December 2010 05:32 |
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