Finding ways and means to accumulate the extra cash might appear quite elusive. But a number of tax credits and tax breaks options have been designed to make it easier for buyers to buy their first homes.
First-time buyers can get a tax credit of up to $8000, thanks to the various federal and state grants and other buyer-friendly schemes of the government.
Who can qualify for tax credits?
As per as the rules laid down by the HUD (Housing and Urban Development), only an individual who meets certain conditions can be considered a first-time residence buyer.
A person who hasn’t owned a residence during a tenure of three years, till the day of purchase of the property. The same rules apply to a person’s spouse as well.
Any single parent who owned a house jointly with their former spouse during the time they were married.
Someone who has owned a property, that wasn’t permanently affiliated to any foundation as per the proper regulations.
If a person owned a residence which didn’t comply with the state or local building costs, then the person will be considered as a first-time homebuyer.
Another important thing to note is the difference between tax credit and tax deduction. Often people think both these terms are essentially the same.
However, they’re not. Tax deduction actually reduces your taxable income. But, a tax credit is a reduction in the amount of taxes you owe to the government. You can save a considerable amounts of money with a tax credit.
Tax Credit and Tax Break Schemes
#1. Mortgage payment interest deduction.
This is fairly well known. Nevertheless, this is one of the most beneficial tax breaks that home buyers can take advantage of.
The Mortgage Interest Deduction or MID is valid for loans up to $1 million. It covers the interest paid on the loans. The MID scheme is very useful for people with new loans, since the interest paid by them is relatively more.
Homebuyers will receive a large chunk of the tax benefit upfront as the first repayments have the highest value of interest to principal amount.
To claim the MID benefit, a homebuyer will have to file an itemized tax return.
#2. Mortgage credit certification.
The Mortgage Credit Certification is yet is another program that can help thousands of first –time homebuyers to secure a tax break. IRS states that the program is aimed at helping the lower-income groups afford their first home.
This scheme is different from the deduction scheme in the sense that it reduces the amount of taxes you owe.
Depending on the price at which you purchased your home, you can get back up to 30% of the interest you pay as tax credit. Although the program is not that popular, it’s really cool.
You can get a considerable amount of money back, every year.
It’s important to note that the program is administered by local authorities and can vary according to the state you live in.
To qualify for this tax credit, you will need a Mortgage Credit Certificate issued by the local government.
#3. IRA withdrawals.
Getting ready to buy your first home? Don’t overlook getting some money from an IRA as you are eligible for a sum of $10,000.
It can help you cover the down payment and other ancillary costs as well. As an added bonus, first-time homebuyers won’t have to pay the 10% penalty which is usually applied to early withdrawals.
Since every individual is entitled to get a lump sum of $10,000 from their IRA accounts, you can use this policy to your advantage.
You can ask your spouse or any of your family members to withdraw $10,000 from their IRA accounts, ending up with more money.
#4. Home improvements
Home improvements can earn you tax deductions in multiple ways.
When you use a home-improvement loan to finance the improvement costs of your home, these loans will also qualify for MIDs, as mentioned above.
The interest on a home-improvement loan is deductible in full, up to a sum of $100,000 in debt.
Secondly, this will help you keep track of the home improvement costs.
At the time of selling the home, you can simply add the improvement cost to the value of the property.
If the selling price of your home is more than what you had spent to procure it, the extra income will be considered taxable.
You can reduce the value of this taxable income by adding the home improvement costs. Thus, you can potentially save a big chunk of money in taxes during the sale.
#5. Home office deduction
Are you a freelancer, just like me? Well, you are in for some good luck.
The amount of space in your home that is dedicated towards official activities is tax-deductible. This deduction will include loan interest, insurance amount, other utilities and repairs.
However, there are certain guidelines for taking advantage of this deduction.
#6. Home energy tax credits.
Well, the IRS rewards homeowners who made efforts to make their homes a little eco-friendly.
The Residential Energy Efficiency Property Credit can cover the costs that are spent towards making the home more energy efficient.
Homeowners can save around 20-30% of the costs incurred for installing energy efficient appliances.
What’s really great is the fact that it is a credit, which implies it will reduce your tax bill directly.
To avail this tax credit, you have to invest in appliances that harness energy from renewable sources such as Solar panels, wind turbines, fuel cells, etc.
In addition to these schemes, there are certain other tax breaks and tax credit policies as well.
Make sure you consider all the tax deductions and tax credits to get the maximum benefit out of these schemes.