How To Handle Taxes For First-Time Homeowners
Co-authored by:
Andrew Latham Certified Financial Planner & a Director at SuperMoney.com
Tax season can be the most exciting or anxious time of the year for anyone. It can be a little stressful when you're not ready for something. If you have or are moving into a new home, you might wonder what else you should know.
What you should remember as you prepare for tax season this year:
Who is considered a first-time homebuyer?
Who qualifies as a first-time buyer?
The current reality of First-time Homeowner Taxes & steps to get Ready: Co-Authored by Andrew Latham of SuperMoney.com
What is the First-Time Homebuyer Act of 2021?
What are first-time buyer tax credits?
How does the $15,000 tax credit for first-time homebuyers operate?
Take advantage of available tax deductions.
Conclusion
Who is considered a first-time homebuyer?
It would be best if you met a few conditions to get a first-time homebuyer's tax credit. The credit isn't just for people who may have never bought a home, despite what its name says. If you haven't owned a home or been a cosigner on a mortgage in the last three years, you are considered a first-time homebuyer.
You must meet one of the following requirements to qualify as a first-time buyer:
Have not owned a house or been a cosigner on a home loan in the past three years
Be a single parent who only owned a home with a former spouse when they were married. Be a displaced homemaker who only owned a home with a spouse.
Have only lived in a house that was fixed to a foundation.
Have only owned a home that doesn't meet state or local building codes and can't be fixed for less than what it would cost to build a permanent structure.
The current reality of First-time Homeowner Taxes & Getting Ready: Co-Authored by Andrew Latham of SuperMoney.com
Buying a home for the first time can be an exciting but overwhelming experience. The tax side of things is pretty straightforward, though. As long as you pay your property taxes, you should be fine. Realtors like to wax poetic on the tax benefits of buying a home, but the truth is most homeowners don't get much nowadays.
The Tax Cuts and Jobs Act (TCJA) reduced the maximum mortgage principal eligible for the tax deduction, removed the personal exemption, and nearly doubled standard deductions. These changes made it pointless for most taxpayers to itemize since they could no longer take both the personal exemption and itemized deductions. In most cases, first-time homebuyers are better off claiming the standard deduction even if they do qualify to itemize the mortgage interest payments.
That doesn't mean buying a house doesn't come with extra tax homework. The first step is to get organized. As soon as you close on your home, gather all of the documents related to your purchase and keep them in a safe place. This includes your mortgage statement, closing statement, property tax bill, and any other related documents.
As a first-time homeowner, you may be eligible for certain tax benefits, such as the mortgage interest deduction and the property tax deduction. However, these deductions don't apply to most homeowners because the vast majority of homeowners are better off claiming the standard deduction. Nevertheless, itemizing does make sense for some homeowners, so do the math and check which option works best for you.
Keep track of home improvements. If you make any improvements to your home, make sure to keep track of the costs. These improvements can also be tax-deductible, so it's important to have documentation of the costs.
Keep accurate records. Make sure to keep accurate records of all your expenses related to your home. This will make it easier to claim deductions and credits on your taxes.
Hire a tax professional. If you're unsure about how to handle your taxes as a first-time homeowner, consider hiring a tax professional to help you navigate the process. Most tax preparation programs, such as TurboTax and TaxAct, are all you need to navigate homeowner tax questions, but in some cases hiring a tax professional can save you a lot of time and money. They can answer any questions you have and ensure that you're taking advantage of all the tax benefits available to you.
What is the First-Time Homebuyer Act of 2021?
Several Democratic lawmakers put forward the First-Time Homebuyer Act of 2021 in response to a campaign promise made by President Joe Biden. This bill would have brought the tax credit first used after the housing crisis in 2008. It would have included many of the same requirements.
Under the new bill, however, eligible homebuyers could get a tax credit of up to 10% of the purchase price of their home, up to a maximum of $15,000. The proposed homeowner tax credit for 2021 is meant to help low-income and middle-income Americans buy homes and build wealth in communities of color that will last for generations. This bill hasn't been signed into law as of December 2022.
What are first-time buyer tax credits?
Tax credits are a method by which the government rewards taxpayers financially for doing certain things or acting in certain ways. When you file their tax return, they directly lower the amount of tax you owe. For instance, if you owed $10,000 in federal taxes and got a $1,000 tax credit, your tax bill would drop to $9,000.
Tax credits are a better way to get people to do something than deductions, which let you lower your taxable income. Deductions lower the amount of taxes you have to pay, but not as much as a credit for the exact amount. People who buy their first home can get credits against their federal income taxes through first-time homebuyer tax credits.
How does the $15,000 tax credit for first-time homebuyers operate?
The first-time homebuyer tax credit in 2021 would work the same way as the one in 2008. Homebuyers who were eligible could get a loan for up to 10% of the purchase price of their home, up to a maximum of $15,000.
Unfortunately, this credit no longer exists. However, bills to create a new refundable tax credit of up to $15,000 for first-time homebuyers were introduced in April 2021. As of March 2023, the legislation still has not passed in Congress.
Even though the original first-time homebuyer credit from 2008 has ended and the First-Time Homebuyer Act of 2021 has not yet been officially passed, there are still some other programs you can glance into as a new homeowner:
Mortgage interest deductions:
This detailed deduction lets homeowners take any interest they paid on loan for their home and deduct it from their taxable income. You'll need proof this tax season to get the mortgage interest deduction. The lender you used to buy your home will send you a 1098 Form that shows how much interest you paid on your mortgage over the past year.
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Property tax reductions:
When you buy your first home, paying property taxes can be scary. However, when it's time to file your taxes, you can write off the state and local property taxes you've paid. You can get a tax break for your main home, vacation home, land, cars, and boats.
Home office costs:
Over the past two years, more people have started working from home. This may have caused your costs for home office supplies to go through the roof. Depending on what you bought, you might be able to get a tax break if you are self-employed or work from home full-time. If you want to save money on your tax return for office costs, your room must be used mostly as an office and be less than 300 square feet.
Conclusion
If the First-Time Homebuyer Act of 2021 becomes law, many Americans with low and middle incomes could get a tax credit for buying a home. Plus, you wouldn't have to pay back the tax credit unless you sold the house in the first four years of owning it.
In the meantime, first-time homebuyers must look into programs like FHA loans, MCCs, and IRA withdrawals that can help them buy a home for less money. If you just bought a home, ensure you understand what costs you can deduct from your taxes. This could help you pay less in taxes.
