Homeowners should know that several homeowner tax breaks expired on December 31st. In the past, Congress has renewed these breaks, however there is no guarantee that they will renew them again. These tax breaks were originally created in response to the collapse of the housing market as temporary aid for homeowners.
Private Mortgage Insurance Deduction
Out of the tax breaks that expired, the one that will affect homeowners the most is the deduction of private mortgage insurance. When purchasing a home, borrowers that are not able to put at least 20 percent of the home’s value down are required to pay for private mortgage insurance. Private mortgage insurance is put in place to protect lenders in the case that a borrower defaults on their loan and stops making their mortgage payments.
Private mortgage insurance payments are generally paid along with your monthly mortgage payment, so some homeowners are unaware of the payment entirely. The typical cost of private mortgage insurance is 0.5 percent of the borrower’s loan amount and over the years this can really add up. Deducting the amount you paid in private mortgage insurance on your annual income taxes can help reduce the cost from about 15 to 35 percent.
If you are accustomed to deducting your mortgage insurance from your taxes, you will need to re-adjust your budget. If you are planning on buying a new home, not having the option to take advantage of the deduction is another reason why you should put at least 20 percent down.
Loan Forgiveness Deduction
Another homeowner tax break that has expired is the loan forgiveness deduction. When a borrower can no longer make their mortgage payments and the lender agrees to take the profits from a short sale in trade. Then, the difference between what was owed on the property and what was paid can be considered taxable income. Not be able to waive this fee can easily add thousands of dollars to the amount a homeowner owes in taxes if they underwent a short sale.
Luckily, the nation has experienced rising home prices throughout 2013 and home prices are expected to continue to rise. With less homeowners being underwater, there are more options available to them in the case that they cannot make their mortgage payments.
Energy-Efficient Improvement Deduction
Another tax deduction that is expiring is the ability for homeowners to deduct the cost of any energy efficient home improvements they have made that year. Deductions can no longer be made after installing items such as new doors and windows, insulation, furnaces, heat pumps, water heaters and central air conditioning. Homeowners will still be able to deduct items such as solar water heaters, wind turbines and geothermal heat systems.
The tax breaks listed above will remain in place for the 2013 tax return, which is due in April 2014. If the deductions apply to you, you can still take advantage of them for the 2013 calendar year. Congress may still make the decision to renew these deductions as well.
Prospect Financial Group, Inc.