Buying your first home is an exciting milestone, but it can also bring a few changes when tax season arrives. From new paperwork to potential deductions, homeownership can affect how you file your taxes, especially in your first year. This guide provides a simple overview of what new homeowners should be aware of so they can feel informed and prepared moving forward.
How Buying a Home Can Affect Your Taxes
Taxes are complicated enough, and as a homeowner, it’s important to understand what that means for you. The first go-around often raises the most questions, and it is recommended to have a professional tax expert in your corner to guide you through any new forms, deductions, and if you are eligible for any tax benefits.
Important Documents to Keep Handy
When tax season is approaching, it’s important to gather any necessary documentation you’ll need. For many, this could include a W-2, a 1099, amongst others. As the owner of the new property, you’ll want to have three documents handy for when it’s time to file.
- Mortgage interest statement (Form 1098): This form summarizes the interest paid on your loan and often comes from your bank and/or lender.
- Property tax bills: This document shows how much you paid in local taxes. Sometimes this is included with the 1098 form. For others, these may be found in bank statements or on the town/city’s tax assessor’s website. Be sure to consult with your expert tax professional if you are unsure where to locate these bills.
- Closing Disclosure: This document is signed during your closing and is helpful for understanding one-time costs from your purchase. You are typically given a physical and/or digital copy following your closing. One of the benefits of working with a Lamacchia Realty REALTOR®, is that many of our agents email their past clients a copy of the closing disclosure at the start of the new year, so they’re handy for taxes!
Common Tax Benefits New Homeowners Should Know About
One of the many benefits to homeownership is the opportunity for tax deductions. When you buy a home, you start having to pay for things you didn’t as a renter. Some of these costs can lower the amount of income you need to contribute to taxes.
Mortgage Interest is Often Deductible
When you make your monthly mortgage payment, part of that payment is allocated to interest. In some cases, the IRS allows homeowners to deduct the mortgage interest they paid that year from their taxable income. This can be especially helpful in the early years of owning a home, as mortgage payments typically include more interest at the beginning of the loan. You can find out how much interest you paid over the year by looking at the1098 form from your lender.
Property Taxes May Be Deductible
Most homeowners are required to pay property taxes to their city or town, and these taxes may also be deductible. It’s important to note that this benefit can vary from person to person, as certain towns/cities may have federal limits on how much residents can deduct.
Certain Loan-Related Costs Could Apply in Your First Year
During your closing, you might’ve paid some additional one-time costs. These can include loan fees, mortgage points, and other items. Some of these costs may be tax-deductible. Your closing disclosure document usually outlines each of your payments, and your expert tax professional can determine which costs, if any, are deductible.
Why Should You Care About These Deductions?
All of the deductions mentioned above can add up very quickly. If you want to lower your taxable income as much as possible, it’s crucial to keep all these deductions organized and file them properly. They can also be a major factor in deciding whether you’ll file your taxes the standard way or by itemizing.
Standard Deduction vs. Itemizing
When you file your taxes, you have two ways to reduce the amount of income you’re taxed on. There is the Standard Deduction, which is the simpler of the two, and likely the one you’re already familiar with. Then there is the option to Itemize your deductions. While this method is more complicated, it may make more sense to pursue as a new homeowner.
Standard Deduction
This option is simple, straightforward, and requires much less paperwork. It’s a flat dollar amount that the IRS subtracts from your income, regardless of what you spent during the year. You don’t need to track or list individual expenses, which makes this choice very popular. As a homeowner, this is typically still a great option, but there are some instances where itemizing makes more sense.
Itemizing Deductions
Itemizing deductions means listing out specific expenses instead of taking the flat deduction. This is where homeownership often comes into play. Costs like mortgage interest and property taxes may be included, and these expenses can add up quickly, particularly in the early years of owning a home.
If the total of your itemized expenses is higher than the standard deduction, itemizing may make more sense. Because of this, buying a home is one of the most common reasons people move away from the standard deduction and begin itemizing.
Situations That May Impact Your Tax Filing
As with most things in life, filing taxes on your home is not a one-size-fits-all process. There are certain scenarios that could affect how you file. These can include, but are not limited to:
- Purchasing your home midway through the year, or at the very end of the year
- Working from home full-time
- Using first-time homebuyer programs or assistance
- Major financial changes alongside buying your home, such as taking out a student loan.
If you fall into any of these categories, it is highly recommended to consult closely with your expert tax professional to determine the best course of action, and to ensure that you are filing properly.
Why Working With a Tax Professional Matters
As a homeowner, especially during your first year, it becomes more important than ever to work with an expert tax professional. They can be one of your biggest allies, by ensuring the accuracy of your taxes and maximizing potential benefits. Additionally, tax laws and deductions can often change, and it’s recommended to have someone in your corner who is consistently up to date with these developments.
A Smart First Step as a New Homeowner
Filing taxes after buying your first home may sometimes feel overwhelming but having a basic understanding of what to expect can go a long way. Knowing which documents matter and which benefits may apply helps set you up for a smoother tax season and more confident conversations about your finances.
Whether you’re preparing to buy your first home or have questions after closing, I’m here to support you every step of the way. As a local, expert REALTOR at Lamacchia Realty, I’m equipped to guide you through the homebuying process with the tools and training necessary to succeed in any market.
**Lamacchia Realty, Inc. is not a licensed tax professional. The information on this website is for illustrative and educational purposes only and is not intended as an offer or solicitation for any tax products/services or any financial instrument. Consult a licensed financial professional for specific products and for more information.**
The post How to File your Taxes After Buying Your First Home first appeared on Lamacchia Realty.